Working Paper: NBER ID: w15731
Authors: Michael D. Bordo; John Landon-Lane
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.
Keywords: No keywords provided
JEL Codes: N12
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Rising prices (P22) | Fed tightening monetary policy (E52) |
| Unemployment peaks (J64) | Fed tightening monetary policy (E52) |
| Fed tightening monetary policy (E52) | Inflationary pressures (E31) |
| Fed's historical tendency to wait until unemployment and output gaps improved (E24) | Pattern of late responses to inflation (E31) |
| Timing of policy changes relative to trough of real variables (real GDP, industrial production) (E32) | Fed tightening after indicators have improved (E52) |