Working Paper: NBER ID: w16815
Authors: Carmen M. Reinhart; Vincent Reinhart
Abstract: Considerable debate rages about whether Federal Reserve policy was too lax in the early part of the 2000s, thereby fueling the home-price bubble that was the proximate cause of the global financial crisis. We present evidence that the view that modest alterations to monetary policy have vast consequences is inconsistent with theory and not supported by evidence. We take a close look at the responses of asset markets to changes in the short-term policy interest rate since the founding of the Fed in 1914. Changes in the federal funds rate have no systematic effect on either long-term interest rates or housing prices over nearly a century. Indeed, since the mid-1990s the policy rate had a negative relationship with long-term interest rates. This is consistent with a global view of capital markets where massive cross-border flows shape the availability of domestic credit and asset prices. The evidence casts doubts on arguments that a moderately different monetary policy path might have mattered.
Keywords: No keywords provided
JEL Codes: E40; E43; E52
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Changes in the federal funds rate (E52) | Long-term interest rates (E43) |
| Changes in the federal funds rate (E52) | Housing prices (R31) |
| Global capital flows (F32) | Domestic credit availability (E51) |
| Global capital flows (F32) | Asset prices (G19) |
| Federal reserve actions (2002-2006) (E52) | Asset overvaluation (G32) |
| Federal reserve actions (2002-2006) (E52) | Financial crisis (G01) |
| Systemic issues in supervision and regulation (G28) | Economic landscape (P17) |