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Monetary Policy during the Recession

  • Economics
  • Political Science


Monetary Policy during the Recession WILLIAM POOLE Brown University Monetary Policy during the Recession THE DEPTH of the current recession makes it clear ex post that government stabilization policy should have been less contractionary in 1974. In fact, both monetary and fiscal policy were extremely contractionary not only relative to the needs of a declining economy but also relative to policy during the 1972-73 boom. During 1974, the full employment budget sur- plus rose sharply and monetary expansion slowed markedly. My task in this report is to analyze the monetary part of recent stabilization policies. A sharp deceleration of money growth (both M1 and M2) since mid-1974 is evident in figure 1.1 Economists generally agree that money growth in the second half of 1974 was too low, but split over the proposition that money growth in the first half-6.2 percent for M1 from December 1973 to June 1974-was about right.2 As I argued a year ago, an M1 growth target of about 6 percent was appropriate on the basis of information available in early and mid-1974.3 Therefore, I applaud the Federal Reserve for restrain- Note: I want to thank the Federal Reserve Bank of Boston for research support and especially Ruth Kupfer and Redenta de Leon of the Bank for research assistance and typing. The views expressed, however, are mine and do not necessarily reflect those of the Federal Reserve Bank of Boston. 1. I am inclined to believe that M2 is more closely related to business conditions than M1, but have decided to use M1 in most of my analysis because the Federal Reserve tends to emphasize it and because the differences in the recent behavior of the two mea- sures are relatively minor. 2. All growth rates in this report are continuously compounded annual rates of growth. 3. William Poole, "Reflections on U.S. Macroeconomic Policy," BPEA (1:1974), pp. 233-46. 123 124 Brookings Papers on Economic Activity, 1:1975 Figure 1. Money Stock and Selected Interest

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