A complication is the large volume of banking system reserves created by the non-traditional policy responses. There is a risk, of much debated magnitude, that the unusually high level of reserves, along with substantial liquid assets of the banking system, could fuel an unanticipated, excessive surge in lending.
- Falling real GDP is a problem
- Falling nominal GDP is a problem
- Nominal GDP is directly affected by tight money (and money is tight now)
- Sticky prices are the reason real GDP falls in consequence
- Real GDP is path-dependent, so monetary policy does matter for the real economy
- If the Fed were willing to target inflation, nominal GDP could be increased and this would help with real GDP