Monetary Policy Is Still Too Tight
Posted at 1:45 p.m. on Feb. 26
Scott Sumner explains why the Federal Reserve’s policies are still too tight, causing nominal gross domestic product (NGDP) to grow “slower than trend” and producing a sluggish and uneven recovery.
“After most recessions the Fed allows above trend NGDP growth, to spur the recovery. In the first quarter of the 1983-84 recovery NGDP rose at an 11% annual rate (7.7% real, 3.3% inflation.).”
“But suppose they kept money so tight that NGDP actually grew slower than trend?… If the recovery was very slow, then over time the housing and auto industries would pickup due to growing population, and also the depreciation of cars… importantly the overall rate of RGDP growth would not be affected… Autos and housing growth would pick up, causing growth to slow in other sectors… And of course this is exactly what’s happened.”