Historical Exit Strategies

Michael Bordo and John Landon-Lane have a new NBER working paper that conducts a historical analysis of the Federal Reserve’s exit strategies from 1920 – 2007. Here is the abstract:

In this paper we provide some evidence on when central banks have shifted from expansionary to contractionary monetary policy after a recession has ended—the exit strategy. We examine the relationship between the timing of changes in several instruments of monetary policy and the timing of changes of selected real macro aggregates and price level (inflation) variables across U.S. business cycles from 1920-2007. We find, based on historical narratives, descriptive evidence and econometric analysis, that in the 1920s and the 1950s the Fed would generally tighten when the price level turned up. By contrast, since 1960 the Fed has generally tightened when unemployment peaked and this tightening often occurred after inflation began to rise. The Fed is often too late to prevent inflation.

Non-gated link here.

One response to “Historical Exit Strategies

  1. Maybe they should try using something new–when nominal expenditure reaches its long term growth path.

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