Monetary Policy and the Rate of Spending Growth

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From an email (that I’ve lightly edited) in response to my column today:

Your article seems to take the premise that loose monetary policy leads to economic growth and to my knowledge, there is no evidence, empirical or otherwise, that shows that relationship. In fact, the largest study ever done regarding loose monetary policy and economic growth showed no correlation whatsoever. Lee’s and Werner’s exhaustive study “Reconsidering Monetary Policy: An Empirical Examination of the Relationship Between Interest Rates and Nominal GDP Growth in the U.S., U.K., Germany and Japan” found no inverse relationship between interest rates (loose policy) and economic growth.

Thank you, R. D., for your letter, which gives me a chance to highlight something the column mentioned only in passing. The view that low interest rates indicate that monetary policy is loose, though a widespread one, seems to me to be a mistake. My column, like the paper you cite, mentions that Milton Friedman recognized it as a mistake. The stance of monetary policy is better measured by whether spending growth is accelerating or decelerating.

I also don’t think that looser money is always warranted even when the term is rightly defined. Money was too loose, and should have been tightened, in the U.S. in the late 1990s and mid 2000s (see here to get a visual sense of what I mean, with some explanation).

From 2008 through 2016, on the other hand, money should have been much looser. But I suspect that had money been looser, the paper you cite would have reached the same conclusion, because nominal GDP growth and interest rates would both have been higher.

Ramesh Ponnuru is a senior editor for National Review, a columnist for Bloomberg Opinion, a visiting fellow at the American Enterprise Institute, and a senior fellow at the National Review Institute.






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