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A Look Back at the Great Recession


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A Look Back at the Great Recession

  1. 1. David Beckworth Western Kentucky University
  2. 2. • Monetary Policy Tightened During Crisis • The Fed Allowed the Money Supply to Collapse • The Fed Did Not Buy Up All the National Debt • The Fed Did Not ‘Artificially’ Lower Interest Rates • The Fed Actually Wants Inflation Between 1% and 2%
  3. 3. What about short-term interest rates? • Think of the market-clearing interest rate (MCI) • During slump: •Household credit demand falls, saving increases => MCI drops •Firm expected return on investment falls => MCI drops • MCI should drop until its profitable for households & firms to borrow again
  4. 4. • Fed will not let inflation take off •IOER •Reverse Repos •Shrink Its Balance Sheet • This means Fed will snuff out any recovery that pushes trend inflation above 2% • Continued Slow Recovery • In my opinion, a key reason for slow recovery past five years