The Three Ways in Which the Post-Korean War Federal Reserve Reacts to/Leads Large Increases in the Unemployment Rate

October 19, 2016

AUTHORS:

Brad DeLong
  • In “Eisenhower” episodes, the Federal Reserve cuts interest rates slowly and shallowly as the unemployment rises, trusting to the equilibrium-restoring self-stabilizing forces of the economy. It then raises interest rates as the economy recovers.
  • In “murder” episodes, the Federal Reserve kills the expansion in order to fight inflation. Interest rates start high when the unemployment rate starts rising, the Fed then cuts interest rates far and quickly as unemployment approaches its peak, after which it raises interest rates as the economy recovers.
  • In “financial crisis” episodes, a financial crisis (S&L 1990; dot-com 2000) sends the unemployment rate up, in response the Federal Reserve cuts interest rates substantially, and then raises them as the economy recovers.

    • Of course, post-2007 fits none of these patterns because of the zero lower bound…

    2016 10 04 Unemployment and Fed Funds Changes numbers 2016 10 04 Unemployment and Fed Funds Changes numbers 2016 10 04 Unemployment and Fed Funds Changes numbers

    October 19, 2016

    AUTHORS:

    Brad DeLong
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