Most economists now accepted the view that the central bank plays a significant role in the economy. The Federal Reserve System as The United States of America’s central bank not only a dominant player in the US economy but also in the world. How can it be? Simply by decreasing and increasing its money supply. Something that only the central bank can do. 

Researchers around the world have shown that if the central bank increases its money supply to the economy, it will stimulate the economy, at least in the short run. By what mechanism? Money supply increase will increase the availability of credits. This will make credit rates cheaper. This will make entrepreneurs produce more because capital is cheaper. This will make consumers also increase their demand supported by the cheaper credit facility. In short, everybody happy. But, in the long run, the price will go up, also known as inflation. 

What makes these research great? Because it compiled data from 110 countries for 30 years. This is huge amount of data. With advanced statistical technique, it can infer valid answer about what causes inflation .

Central banks also can save or fail commercial banks in bad crises, like The Great Depression in the 1930s or the Great Recession in 2008-2009. They do this by becoming “a lender of last resort” for commercial banks. It will prevent consumer panic while banks went bankrupts during a bad time. In short, the central bank can save or worsen the economy of billions of people on the planet.

These powerful effects of the central bank make some economists argued half-serious that “Fed Governor is the second most influential person in the world, come only after President of The United States.”

What makes these research great? Because the method is very simple but accurate and effective. The method is difference-in-difference. It similar with randomized controlled trials, only simpler.

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