Download - A Look Back at the Great Recession
A Look Back at the Great Recession
David BeckworthWestern Kentucky
University
Five Surprising Facts
•Monetary Policy Tightened During Crisis• The Fed Allowed the Money Supply to Collapse• The Fed Did Not Buy Up All the National Debt• The Fed Did Not ‘Artificially’ Lower Interest Rates• The Fed Actually Wants Inflation Between 1% and 2%
Monetary Policy Tightened In the Crisis
Monetary Policy Tightened In the Crisis
Slow Down Money Supply
Increase Money Demand…
Reduce Total Dollar Spending
Reduce Total Dollar Spending …and No Fed
Offset
Monetary Policy Tightened In the Crisis
Monetary Policy Tightened In the Crisis
Monetary Policy Tightened In the Crisis
The Fed Allowed the Money Supply to
Collapse
The Fed Allowed the Money Supply to
Collapse
The Fed Allowed the Money Supply to
Collapse
Fed Did Not Buy Up All the Debt
Fed Did Not Buy Up All the Debt
Fed Did Not Buy Up All the Debt
Fed Did Not Artificially Lower Interest Rates
Fed Did Not Artificially Lower Interest Rates
Fed Did Not Artificially Lower Interest Rates
Fed Did Not Artificially Lower Interest Rates
What about short-term interest rates?• Think of the market-clearing interest rate
(MCI) • During slump:•Household credit demand falls, saving increases => MCI drops•Firm expected return on investment falls => MCI drops
• MCI should drop until its profitable for households & firms to borrow again• Problem: Zero Lower Bound
Fed Did Not Artificially Lower Interest Rates
The Fed Wants 1% - 2% Trend Inflation
The Fed Wants 1% - 2% Trend Inflation
The Fed Wants 1% - 2% Trend Inflation
Implications for the Future• Fed will not let inflation take off• IOER•Reverse Repos•Shrink Its Balance Sheet
• This means Fed will snuff out any recovery that pushes trend inflation above 2%• Continued Slow Recovery • In my opinion, a key reason for slow
recovery past five years