Roger Farmer of UCLA proposes a new style of monetary policy:
The Fed should target a stock market index in addition to its traditional role of setting the interest rate. My proposal allows the Fed to use variations in the fed funds rate to fight inflation and variations in the growth rate of a stock price index to manage confidence and select a high employment equilibrium.
A fiscal expansion is necessary in the current situation (large slump), but fiscal policy alone is not enough: A stimulus package large enough to restore full employment will increase the debt burden on future generations to an unacceptable level. The time has come to implement a new monetary policy for the 21st century.
He thinks a gloomy economy needs a confidence: people should feel they are getting better and wealthier in order for the economy to recover.
Many people feel bad in the time of recession, in which they always hear sad news(job losses, major company's bankruptcies and so on) and many may suffer from such hardships, so they need something bright for the future.
What is that? I don't know and I don't think you surely know. It is a socially psychological problem. He suggests we need a policy to boost up our mind and confidence and policy makers try to do it.
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