Let’s close the gap: Revising teaching materials to reflect how the Federal Reserve implements monetary policy

Jane Ihrig and Scott Wolla in this Federal Reserve Working Paper:

The topic of the Federal Reserve’s (the Fed’s) implementation of monetary policy has a significant presence in economics textbooks as well as standards and guidelines for economics instruction. This presence likely reflects the fact that it is the implementation framework that helps ensure that the Fed’s desired level of its policy interest rate is transmitted to financial markets, which helps it steer the economy toward the Congressional dual mandate of maximum employment and price stability.

Over the past decade or so, the Fed has purposefully shifted the way it implements monetary policy to an environment with ample reserves in the banking system, and it has introduced new policy tools along the way.

This paper shows that, unfortunately, many teaching resources are not in sync with the Fed’s current framework. We review six, 2020 or 2021 edition, principles of economics textbooks, and we find they vary greatly in their coverage of the concepts associated with the way the Fed implements policy today and in the longer run.

We provide recommendations on how the authors can improve the next editions of their textbooks. We also review standards and guidelines used by secondary school educators. All of these are out of date, and we provide proposals for how these materials can be updated.

As textbooks don’t catch up, central bank researchers are trying to do their bit.

Reserve Bank of Australia economist also released similar research last year.

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