Monetary Policy and the 1992 Election

David Altig objects to this Angrybear post from Cactus. Cactus notes a surge in the growth of M1 but David notes that M2 growth was not as high as M1 growth:

According to M2 growth, monetary policy was actually tightening up during the election year 1992 and did not look particularly tight in 2000.

In the comment box, our friend William Polley echoes David’s observation that financial innovations “knocked both M1 and monetary base growth out of contention as stable indicators of the stance of monetary policy” (David’s words). I tend to agree with David and William and wanted add my two cents by looking at the real variables such as real GDP growth, which was only 1.9% in 1990 followed by a 0.2% drop in 1991. So the 3.3% growth in 1992 and 2.7% growth in 1993 suggests to me that monetary policy may have been a bit too tight during this period. Our graph shows the employment to population ratio during the 1989 to 1993 period. It seems that had the Federal Reserve tried to abuse monetary policy to help George H. W. Bush win reelection, it did a very poor job. While William Nordhaus suggested a political business cycle model to explain monetary policy in 1972 – monetary policy twenty years later does not seem to fit this theory.