Researcher at San Francisco Fed warns of Excessive Easy Monetary Policy

Today we see an article, Betting the house: Monetary policy, mortgage booms and housing prices by Oscar Jorda, Moritz Schularick, Alan Taylor. They warn of excessive easy monetary policies.

Their research uses a large data set.

“In our new paper (Jordà et al. 2014), we analyse the link between monetary conditions, mortgage credit growth, and house prices using data spanning 140 years of modern economic history across 14 advanced economies. Such a long and broad historical analysis has become possible for the first time by bringing together two novel datasets, each of which is the result of an extensive multi-year data collection effort.”

Their research gives a warning that low interest rates will be detrimental to the stability of the economy.

“These historical insights suggest that the potentially destabilising by-products of easy money must be taken seriously and considered against the benefits of stimulating flagging economic activity… Resolving this dichotomy requires central banks to make greater use of macroprudential tools alongside conventional interest rate policy. “

The implication may be that conventional interest policy would suggest a higher Fed rate than we currently see.

Keynes also wrote that low interest rates used to stimulate an economy could eventually produce more waste than benefits. (Chapter 22 of General Theory)

“… it is, I think, arguable that a more advantageous average state of expectation might result from a banking policy which always nipped in the bud an incipient boom by a rate of interest high enough to deter even the most misguided optimists. The disappointment of expectation, characteristic of the slump, may lead to so much loss and waste that the average level of useful investment might be higher if a deterrent is applied.”

The Federal Reserve would like to get out of the Zero Low Bound business, if they can.

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