Saturday, July 10, 2010

What's Policy Supposed to Do?

When we teach monetary policy, we tell students that counter-cyclical policy would be to expand the money supply as a recession or panic hits, and these off as the economy turns the corner to recovery. And while we haven't heard anything official on the end of the most recent recession, many economists think the economy turned the corner in summer 2009.

Marginal Revolution provides an interesting link to the Shadowstats website. The charts show growth data for the monetary base, M1, M2 and what appears to be a proxy M3 measure (M3 is no longer officially recorded), beginning in 2006. (Please note, the charts in the explanatory links from the Federal Reserve Bank of St. Louis cover a longer period than the charts on Shadowstats.) There is a clear uptick as the financial crisis kicks in 2008. (The Fed clearly learned something from 1929.) And growth, while still accommodative, has fallen from the higher levels of 2009. These could be useful in teaching those chapters on monetary policy, if you want to illustrate what accommodative policy during a financial crisis looks like.

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