Was monetary policy tight in late 2008?
Let’s start with my argument that money was very tight in late 2008. Most economists have assumed that the Fed adopted a policy of extreme ease in late 2008. Perhaps so, but I have yet to see a persuasive argument for this assumption. Some would point to the fact that the Fed cut its target rate to very low levels in 2008. Is that reasoning any different from when (in 1938) Joan Robinson argued that easy money couldn’t have caused the German hyperinflation, as interest rates in Germany were not low? Surely in the 21st century we aren’t still using nominal interest rates as an indicator of the stance of monetary policy? Friedman and Schwartz (1963) demonstrated that interest rates are a very poor indicator on monetary policy. In the early 1930s, the Fed cut its discount rate just as sharply as in 2007-08, and yet today almost no one believes money was easy during the Great Contraction. Mishkin’s best-selling monetary economics textbook teaches our students that: “It is dangerous always
