Thursday, June 11, 2009

Monetary Policy has No Noticeable Impact on Prices in the Short Run

The chart below compares monetary policy, as measured by the size of the monetary base, in 1929-30 with 2008-9. The red line measures the (seasonally adjusted) monetary base in each month through July 1930, normalized so that October 1929 is 100 (for example, the value of 99.2 in April 1929 means that the monetary base then was 0.8 percent lower than it would be in October).



As you can see, the monetary base evolves very differently now than in 1929-30. Back then, the monetary base fell somewhat (Milton Friedman and Anna Schwartz long criticized the Fed for that, blaming the deflation and a significant part of the Depression on the Fed's failure to expand money). In the fall of 2008, the monetary base exploded. You might say that is exactly what Friedman and Schwartz would have them do (although Friedman's AEA Presidential Address says "no sharp turns" -- the chart above looks like a sharp turn to me).

Using the same format as the chart above (except no seasonal adjustments, as those CPI adjustments are not available for 1929-30), the chart below shows the CPI in 1929-30 and 2008-9.



Despite the dramatic difference in monetary policy, I fail to see a dramatic difference in the CPI. Of course, the CPI continued to fall for a long time after 1929, so maybe we can look at this graph a year from now and see a more obvious difference.

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