Ben Bernanke Undergraduate Thesis

Ben Bernanke Undergraduate Thesis-78
I skipped classes to attend a World Series game against the Cincinnati Reds.

I skipped classes to attend a World Series game against the Cincinnati Reds.

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These, obviously, are not the kind of topics chosen by many recent Class Day speakers--Will Farrell, Ali G, or Seth Mac Farlane, to name a few.

But, then, the Class Marshals presumably knew what they were getting when they invited an economist.

In part, this was because policymakers, in choosing what they believed to be the appropriate setting for monetary policy, overestimated the productive capacity of the economy. Federal Reserve policymakers also underestimated both their own contributions to the inflationary problems of the time and their ability to curb that inflation.

For example, on occasion they blamed inflation on so-called cost-push factors such as union wage pressures and price increases by large, market-dominating firms; however, the abilities of unions and firms to push through inflationary wage and price increases were symptoms of the problem, not the underlying cause.

Before the embargo, in 1972, the price of imported oil was about $3.20 per barrel; by 1975, the average price was nearly $14 per barrel, more than four times greater.

President Nixon had imposed economy-wide controls on wages and prices in 1971, including prices of petroleum products; in November 1973, in the wake of the embargo, the President placed additional controls on petroleum prices.

Meanwhile, consumer price inflation, which had been around 3 percent to 4 percent earlier in the decade, soared to more than 10 percent during my senior year.

The oil price shock of the 1970s began in October 1973 when, in response to the Yom Kippur War, Arab oil producers imposed an embargo on exports.

For the Federal Reserve, two crucial lessons from this experience were, first, that high inflation can seriously destabilize the economy and, second, that the central bank must take responsibility for achieving price stability over the medium term. In that year, crude oil cost a little more than per barrel.

Since then, crude oil prices have increased more than fourfold, proportionally about as much as in the 1970s.


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