I would like you to consider the selected chapters from Akerlof & Shiller’s Animal Spirits, and Mishkin’s Monetary Policy Strategy chapter as they relates to the textbook model of what central banks do and how they do it. Do you believe there is enough evidence to show that there is money illusion or not? You might also consider whether or not you believe there is a long-run trade-off between inflation and unemployment. Most of the theories we have discussed assume that there is no long-run trade-off between inflation and unemployment. If there is or is not a long-run trade-off, how might we need to re-examine our economic models? Do we need a fundamental change in our thinking, or are Akerlof and Shiller overstating their case? Finally, you could consider the role that money illusion plays in the conduct of central bank policy. Does the Fed need to alter their conduct of policy if there is money illusion? Or should the Fed continue to act as they have going forward? Were recent events simply bad luck and a large shock to demand or productivity? Or does the Fed have some crucial role to play going forward?
This blog is largely open-ended, but I would like you to consider not just supporting your argument, but also defending your stance. You can discuss any of these issues as they relate to central banking and monetary theory. Try to imagine what someone who disagrees with you might say when you are formulating your comment. Also, offer some evidence to support your argument.