Abstract
For several decades, and perhaps even centuries, economists have been trying to find the ‘silver bullet’ of macroeconomic policy that could effectively eliminate all non-‘real’ business cycles. The current dominant view within macroeconomics, called the New Consensus, believed the age-old problem had been solved during the time period known as the Great Moderation. Adjusting the overnight interest rate (Fed Funds Rate) was deemed sufficient for the Federal Reserve to achieve its broader targets of maximum employment and stable prices (Woodford 2002). Unfortunately, the New Consensus's view was severely undermined by the recent financial crisis. Despite lowering the Fed Funds Rate to the zero lower bound, unemployment continued to rise and inflation continued to fall.
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