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Journal Article
When Tight Is Too Tight: The Federal Reserve’s Response to the Post-World War II Spike in Inflation
With the end of World War II, the massive expansion of defense spending came to a halt, and the money supply financing it quickly stabilized. However, the real money supply declined further with the transitory inflationary upswing of 1946–47, which fueled deflationary expectations, passively pushing up real interest rates and triggering the 1949 recession. We compare the Fed’s current stance to this historical episode, concluding that the ongoing tightening is already sufficient to normalize monetary conditions to prepandemic trends. This article also discusses how fiscal policy might ...
Discussion Paper
Money Aggregates, Debt, Pent-Up Demand, and Inflation: Evidence from WWII
The COVID-19 pandemic produced a massive decline in U.S. consumption in 2020 and swiftfiscal and monetary responses. After growing at a rather steady 5 percent rate for decades, the moneysupply (M2) increased 25 percent over the past year alongside unprecedented fiscal support, raisingsome inflationary concerns. Concurrent with the reopening of the economy as vaccines roll out, thisarticle derives some lessons from the U.S. experience during and after WWII. The debt-to-GDP ratioincreased from 40 percent to 110 percent because of the war effort. Most of it was financed by Fed debtpurchases, ...
Discussion Paper
Money Aggregates, Debt, Pent-Up Demand, and Inflation: Evidence from WWII
The COVID-19 pandemic produced a massive decline in U.S. consumption in 2020 and swift fiscal and monetary responses. After growing at a rather steady 5 percent rate for decades, the moneysupply (M2) increased 25 percent over the past year alongside unprecedented fiscal support, raising some inflationary concerns. Concurrent with the reopening of the economy as vaccines roll out, this article derives some lessons from the U.S. experience during and after WWII. The debt-to-GDP ratio increased from 40 percent to 110 percent because of the war effort. Most of it was financed by Fed debt ...
Journal Article
When Tight Is Too Tight: The Federal Reserve’s Response to the Post-World War II Spike in Inflation
With the end of World War II, the massive expansion of defense spending came to a halt, and the money supply financing it quickly stabilized. However, the real money supply declined further with the transitory inflationary upswing of 1946–47, which fueled deflationary expectations, passively pushing up real interest rates and triggering the 1949 recession. We compare the Fed’s current stance to this historical episode, concluding that the ongoing tightening is already sufficient to normalize monetary conditions to prepandemic trends. This article also discusses how fiscal policy might ...