Transcript 22-79 Can Policymakers Distinguish a Recessionary Gap from a

Stephen G. CECCHETTI • Kermit L. SCHOENHOLTZ
Chapter Twenty-Two
Understanding Business Cycle
Fluctuations
McGraw-Hill/Irwin
Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved.
Introduction
• While the economy can and does move away
from long-run equilibrium, it has a natural selfcorrecting mechanism.
• It returns it to the point where resources are being
used at their normal rates and
• Gaps between current and potential output
disappear.
22-2
Introduction
• Why is it that output and inflation vary from
quarter to quarter and year to year?
• What determines the extent of the fluctuations?
• Figure 22.1 illustrates the long-run trends in
the U.S. inflation rate over the past 50 years.
• It also displays a series of shaded bars
representing recessions.
22-3
Introduction
• While there is no apparent relationship between
the level of inflation and these recessions, it
does appear that the inflation rate:
• Falls when the economy is contracting.
• Rises when it is expanding.
• At least that is what happens most of the time.
• But in general there appears to be a connection
between growth and changes in inflation.
22-4
Introduction
22-5
Introduction
• In recent years, the frequency of recessions has
fallen.
• Recessions used to occur once every five years.
• Now they occur on average about every eight years.
• This reduction in the volatility of real growth
has been called the “Great Moderation.”
22-6
Introduction
• In this chapter we will:
• Catalogue the various reasons that the dynamic
aggregate demand curve and the aggregate supply
curve shift.
• Examine what happens during the transition as the
economy moves to long-run equilibrium.
• Use the model to understand how central bankers
work to achieve their stabilization objectives.
22-7
Introduction
• We will also examine:
• How policymakers work to achieve their
stabilization goals;
• The appropriate actions to take when potential
output changes; and
• The difficulty central bankers have figuring out why
output has fallen.
22-8
Sources of Fluctuations in Output and
Inflation
•
Remember that long-run equilibrium means:
1. Y = YP output = potential output.
2.  = T
inflation = target inflation.
3.  = e
inflation = expected inflation.
•
Short-run equilibrium means:
•
The dynamic aggregate demand curve (AD) and
the short-run aggregate supply (SRAS) curve
cross.
22-9
Sources of Fluctuations in Output and
Inflation
• Immediately after either the SRAS curve or
AD curve shift, the economy will move away
from its long-run equilibrium.
• Understanding short-run fluctuations in output
and inflation requires that we study shifts in
AD and SRAS.
22-10
Sources of Fluctuations in Output and
Inflation
• In this chapter we will be looking at shocks.
• Economists define shocks as something unexpected,
for example, an increase in oil prices or change in
consumer confidence.
• A shock shifts the AD or SRAS curve.
• Because it affects costs of production, the oil price
increase is a supply shock.
• A change in consumer confidence affects
consumption expenditure so it is a demand shock.
22-11
Shifts in the Dynamic Aggregate
Demand Curve
• Recall that a shift in the AD curve can be cause
by either:
• A shift in the monetary policy reaction curve or
• A change in components that are not sensitive to the
interest rate that shifts aggregate expenditure, for
example, government spending.
22-12
A Decline in the Central Bank’s
Inflation Target
• Over the past several decades, numerous
countries have succeeded in reducing their
inflation rates from fairly high levels to the
modest ones we see today.
• All of these changes involved permanent
declines in inflation that must have been a
result of a decrease in the central bank’s
inflation target.
22-13
A Decline in the Central Bank’s
Inflation Target
• To analyze this, we begin with the monetary
policy reaction curve.
• A fall in T shifts the monetary policy reaction
curve to the left.
• The decrease in the inflation target raises the real
interest rate policymakers set at each level of
inflation.
• This reduces aggregate expenditure shifting the AD
curve to the left as well.
• The economy moves to a new short-run
equilibrium.
22-14
A Decline in the Central Bank’s
Inflation Target
22-15
A Decline in the Central Bank’s
Inflation Target
• The new short-run equilibrium at 2 has
inflation and current output lower than they
were prior to the monetary policy tightening.
• This creates a recessionary gap: Y < YP.
• There is now downward pressure on
production costs.
• This shifts SRAS to the right.
• The new long-run equilibrium at 3 is where
inflation equals the central bank’s new target
and output equals potential output.
22-16
A Decline in the Central Bank’s
Inflation Target
22-17
An Increase in Government Purchases
• What are the macroeconomic implications of a
large expansionary move in fiscal policy?
• An increase in G shifts the AD curve to the
right.
• The economy moves from the original shortrun equilibrium point 1 to a new short-run
equilibrium point 2.
• The immediate impact is to raise both current output
and inflation.
22-18
An Increase in Government Purchases
22-19
An Increase in Government Purchases
• Because potential output has not changed, this
is not the long-run effect.
• The higher level of current output means that
there is an expansionary gap: Y > YP.
• Firms increase both their product prices and wages
more than they would at normal output.
• This shifts the SRAS curve to the left, driving
inflation even higher.
22-20
An Increase in Government Purchases
• As inflation increases, monetary policymakers
raise the real interest rate, moving the economy
along the AD curve.
• Output begins to fall back toward its long-run
equilibrium level, potential output.
• The economy settles at point 3.
• Note, however, that inflation is higher at 3 than
it was at 1.
• This is above the policymakers’ original
inflation target, T.
22-21
An Increase in Government Purchases
22-22
An Increase in Government Purchases
• So long as monetary policymakers remain
committed to their original inflation target,
they need to do something to get the economy
back to the point where it began.
• In this case, tighter monetary policy shifts the
AD curve to the left.
• This brings the economy back to the long-run
equilibrium where output equals potential output
and inflation equals the central bank’s target.
22-23
An Increase in Government Purchases
• Without a change in
target inflation, an
increase in government
purchases causes a
temporary increase in
both output and
inflation.
22-24
A Decline in Aggregate Expenditure
• A decline in aggregate expenditure has the
opposite effect of an increase in government
spending.
• The AD curve shifts to the left, driving output
down.
• A decline in aggregate expenditure causes a
temporary decline in both output and inflation.
• In the absence of any monetary policy
response, the recessionary output gap causes
the SRAS curve to shift to the right.
22-25
A Decline in Aggregate Expenditure
• The shift in the SRAS curve drives inflation
down future and current output begins to rise
toward potential.
• If policymakers do not react, inflation and
output will return to their original long-run
levels.
22-26
Shifts in the Dynamic Aggregate
Demand Curve - Examples
• In response to increases in government
spending during the escalation of the Vietnam
War in the late 1960s,
• The Fed simply allowed inflation to rise.
• What could have been a temporary increase in
inflation became a permanent one.
22-27
Shifts in the Dynamic Aggregate
Demand Curve
• Large tax cuts in 2001 and rise in defense
spending associated with the war in Iraq did
not have the same impact at in the 1960s.
• The fiscal stimulus came at a time when the
economy was weakening for other reasons.
• The Fed had learned the important lesson that it
may need to raise interest rates to counter the risk of
inflation from expansionary fiscal policy.
22-28
Summary of Impact of Increase in
Dynamic Aggregate Demand
22-29
Shifts in Short-Run Aggregate Supply
• Changes in production costs shift the SRAS
curve.
• What are the effects of an increase in the costs
of production - a negative supply shock?
• Ex: Increase in price of oil.
• Immediately the SRAS curve shifts left.
• These are bad consequences: higher inflation and
lower growth
22-30
Shifts in Short-Run Aggregate Supply
• The short-run equilibrium moves to point 2
where the new SRAS curve meets AD.
• This creates a condition referred to as
stagflation.
• Economic stagnation coupled with increased
inflation.
• The recessionary gap puts downward pressure
on production costs and inflation.
22-31
Shifts in Short-Run Aggregate Supply
22-32
Shifts in Short-Run Aggregate Supply
• As a result of the recessionary gap, the SRAS
curve begins to shift right.
• This drives inflation down and output up.
• This continues until the economy returns to
potential output and the central bank’s target
inflation level.
22-33
Shifts in Short-Run Aggregate Supply
• As with an increase in government purchases, a
supply shock has no effect on the economy’s
long-run equilibrium point.
• A supply shock causes inflation to rise
temporarily and then fall.
• This happens at the same time that current output
falls temporarily and then rises.
• In the long run, the economy returns to the
point where output equals potential output and
inflation equals the central bank’s target.
22-34
Shifts in Short-Run Aggregate Supply
22-35
1. A recession is a decline in activity, not just a
dip in growth rate.
2. Exact length is ambiguous.
3. Dating the peaks and troughs involves
judgment.
• Table 22.3 displays the results of the NBER’s
analyses of the business cycle since the end of
WWII.
• Recessions differ along several dimensions:
depth, duration, and diffusion.
22-36
22-37
22-38
Using the Aggregate DemandAggregate Supply Framework
We examine the following:
1. How do policymakers achieve their stabilization
objectives?
2. What accounts for the “Great Moderation”?
3. What happens when potential output changes?
4. What are the implications of globalization for
monetary policy?
5. Can policymakers distinguish a recessionary gap
from a fall in potential output?
6. Can policymakers stabilize output and inflation
simultaneously?
22-39
How Do Policymakers Achieve Their
Stabilization Objectives?
• The aggregate demand-aggregate supply
framework is useful in understanding how
monetary and fiscal policymakers seek to
stabilize output and inflation using stabilization
policy.
• When shifting their reaction curve, central
bankers shift AD.
• They cannot shift the SRAS curve.
• This means monetary policymakers can
neutralize demand shocks, but cannot offset
supply shocks.
22-40
How Do Policymakers Achieve Their
Stabilization Objectives?
• Nevertheless, positive supply shocks that raise
output and lower inflation provide
policymakers with an opportunity.
• Following a positive supply shock, central bankers
can guide the economy to a new, lower inflation
target without inducing a recessionary output gap.
22-41
How Do Policymakers Achieve Their
Stabilization Objectives?
• As for fiscal policy, our macroeconomic
framework allows us to study the impact of
changes in government taxes and expenditures
as well.
• The active use of fiscal policy faces great
challenges.
• The conclusion is that stabilization policy is
usually best left to central bankers.
22-42
Monetary Policy
• What happens if consumers and businesses
suddenly become more pessimistic about the
future?
• This shifts the AD curve to the left.
• Output falls below potential causing a recessionary
gap.
22-43
Monetary Policy
• Drop in consumer or
business confidence:
•
AD0 AD1
•
Economy 12
• Stabilization requires
shifting AD back to
where it started.
22-44
Monetary Policy
• Policymakers will conclude that the long-run
real interest rate has fallen.
• If the inflation target stays the same, the drop
in aggregate expenditure prompts them to shift
the monetary policy reaction curve to the right.
• This reduces the level of the real interest rate.
• The AD curve now shifts right, back to its
original level.
• The policy response means the economy will
be back at long run equilibrium.
22-45
Monetary Policy
22-46
Monetary Policy
• In practice, it is extremely difficult to keep
inflation and output from fluctuating when
aggregate expenditure changes.
• There are two reasons:
• It takes time to recognize what has happened.
• Changes in interest rates do not have an immediate
impact on the economy.
• While in theory we can neutralize aggregate
demand shocks, in reality they create short-run
fluctuations in output and inflation.
22-47
• Stability improves welfare.
• Individuals strive to stabilize consumption, but
it can be difficult.
• When income falls temporarily you can:
• Draw on savings (emergency funds) or
• Borrow using credit.
• But credit is only a stop-gap measure.
• The financial crisis of 2007-2009 demonstrates
how risky credit can be.
22-48
Discretionary Fiscal Policy
• There are two types of fiscal policy:
• Automatic stabilizers.
• Automatic stabilizers operate without any
further actions on the part of the government.
• Ex: unemployment insurance and the
proportional nature of the tax system.
• Discretionary policy.
• Discretionary policy relies on fiscal
policymakers’ decisions.
• Discretionary policy changes aggregate
expenditures shifting the dynamic aggregate
demand curve.
22-49
Discretionary Fiscal Policy
•
•
Fiscal policy can act just like monetary policy
to offset shifts in the dynamic aggregate
demand curve and stabilize inflation and
output.
On closer examination, however, it has at
least two shortcomings:
1. Discretionary fiscal policy works slowly, and
2. It is almost impossible to implement effectively.
22-50
Discretionary Fiscal Policy
• Because economic data only become available
several months after they are collected, the
economy is often halfway through a recession
before there is a consensus that a downturn has
actually started.
• This means that discretionary fiscal policy is
likely to have its biggest impact when it is no
longer needed.
22-51
Discretionary Fiscal Policy
• Also, remember that economists don’t write
stimulus packages; politicians do.
• Economics clearly collides with politics where
fiscal stimulus is concerned.
• For economists, the best policies are the ones that
influence a few key people to change their behavior,
avoiding rewarding people who do what they would
have done anyway.
• For politicians, the best policies are programs that
reward the largest number of people possible.
22-52
Discretionary Fiscal Policy
• Therefore discretionary fiscal policy is a poor
stabilization tool.
• Under most circumstances, stabilization policy
is probably best left to the central bankers.
• They have both the ability to act quickly and the
independence to put the economy before politics.
• During the 2007-2009 financial crisis, many
industrial countries undertook large-scale
discretionary fiscal stimulus.
22-53
Positive Supply Shocks and the
Opportunity They Create
• What happens when production costs fall - a
positive supply shock?
• The SRAS curve shifts to the right.
• This drives up inflation and output immediately.
• We have an expansionary gap.
• This leads to increasing costs which shift the
SRAS curve to the left.
• This continues until the economy returns to the
original long-run equilibrium.
22-54
Positive Supply Shock
• Fall in production costs
shifts SRAS Right.
• Economy 12
• Costs rise and SRAS
moves back to original
level.
• Economy 21
22-55
Positive Supply Shocks and the
Opportunity They Create
• However, a positive supply shock creates an
opportunity for policymakers to guide the
economy to a new, lower inflation target
without inducing a recession.
• Central bankers will shift the monetary policy
reaction curve to the left.
• The AD therefore shifts left as well.
• This continues until it reaches the point where the
new SRAS curve intersects the LRAS curve.
22-56
Positive Supply Shocks and the
Opportunity They Create
22-57
What Accounts for the Great
Moderation
• The 1990s brought unprecedented economic
stability - the “Great Moderation” in the
volatility of real growth.
• From 1991 to 2001 there were 10 years of solid
growth and inflation fell steadily.
• The volatility of inflation and growth dropped by
more than half.
• This prosperity and stability was shared across
the industrialized world.
22-58
What Accounts for the Great
Moderation
•
There are three possible explanations for this
worldwide economic performance:
1. Everyone was extremely lucky.
2. Economies have become more flexible in
absorbing external economic disturbances.
3. Monetary policymakers have figured out how to
do their job more effectively.
22-59
What Accounts for the Great
Moderation
• The 1990s was not a calm period for the
financial markets, so it is difficult to argue that
the stability was just good fortune.
• So what is it?
• Advances in information technology have
increased manufactures’ flexibility in
responding to changes in demand.
• This resulted in dramatic declines in inventories at
every stage of the production process.
22-60
What Accounts for the Great
Moderation
• Innovations in mortgages and other forms of
personal credit made it easier for households
and businesses to borrow.
• They were then better able to smooth their spending
during periods of temporary income fluctuations.
• However, rising levels of risky debt eventually led
to record defaults during the financial crisis.
22-61
What Accounts for the Great
Moderation
• That leaves monetary policy as the only
remaining explanation.
• Economists now have a much better
understanding of how to implement monetary
policy.
• To succeed in keeping inflation low and stable
while keeping real growth high and stable,
central bankers must focus on raising real
interest rates when inflation goes up and
lowering them when inflation goes down.
22-62
What Accounts for the Great
Moderation
• While keeping inflation low and stable is
necessary for reducing economic volatility, the
deep recession that began in December 2007
shows that it is not sufficient.
• If households and businesses are no longer able
or willing to use credit to smooth their
spending over time it may not be possible for
Fed policymakers to sustain the low economic
volatility of the 1985-2007 period, even if they
remain effective in keeping inflation low.
22-63
What Happens When Potential
Output Changes?
• We have assumed up to this point that potential
output has not change.
• But potential output can change.
• The consequences for both short-run
movements in output and inflation and for
long-run equilibrium are important.
22-64
What Happens When Potential
Output Changes?
• What happens when YP increases due to an
increase in productivity?
• The long-run aggregate supply curve will shift to
the right as YP increases.
• An increase in productivity reduces costs of
production, so it is a positive supply shock as well.
• The SRAS curve will shift right.
• Remember that the SRAS curve intersects the
LRAS curve at the point where current inflation
equals expected inflation.
22-65
What Happens When Potential
Output Changes?
• An increase in YP shifts
SRAS right and shifts
LRAS right.
• But SRAS still crosses
LRAS where = e.
• SRAS shifts the same
distance as LRAS.
22-66
What Happens When Potential
Output Changes?
• In the short-run, output and inflation are
determined by the intersection of SRAS and
AD.
• Since AD is unchanged, the economy is at
point 2 in the short-run.
• We can see this is the following graph.
22-67
What Happens When Potential
Output Changes?
22-68
What Happens When Potential
Output Changes?
• In the long run, output must go to the new level
of potential output, YP1.
• How it gets there depends on what monetary
policymakers do.
• If policymakers are happy with their inflation
target, they will work to move the economy to
the point on the LRAS curve consistent with
their target.
22-69
What Happens When Potential
Output Changes?
• But the higher level of potential output comes
along with a lower long-run real interest rate.
• Returning inflation to its higher level means shifting
the monetary policy reaction curve to the right.
• This shifts AD to the right.
• The policy adjustment will drive output and
inflation up until they reach their new LR
equilibrium level at the original inflation target and
YP1.
22-70
What Happens When Potential
Output Changes?
• With T unchanged,
policymakers shift AD
right.
• The economy moves to
the new level of
potential output and the
original T at point 3.
22-71
What Happens When Potential
Output Changes?
• Remember, however, that a positive supply
shock creates an opportunity for monetary
policymakers to reduce their inflation target.
• If policymakers do nothing, at point 2, there is
a recessionary gap.
• This lowers production costs shifting the SRAS
curve to the right.
• This continues until output equals potential output.
• Long run in this case is at a new lower inflation
target at the new potential output.
22-72
What Happens When Potential
Output Changes?
• With a new, lower T:
policymakers allow the
economy to move to
point 4.
• They do this by leaving
the monetary policy
reaction curve alone.
22-73
What Happens When Potential
Output Changes?
• In the 1990s the LRAS curve shifted to the
right, and when it did the Fed took the
opportunity to reduce their implicit inflation
target.
• At the time, this was referred to as
opportunistic disinflation.
• This describes declines in inflation.
22-74
What Are the Implications of
Globalization for Monetary Policy?*
• The simplest way to understand the
macroeconomic impact of international trade is
to think of it as a source of productivity
enhancing technological progress.
• Shifting the factors of production from
domestic to foreign factories is the same as
U.S. producers finding a new, cheaper
technology to produce domestically.
• Improvements in technology increase potential
output.
22-75
What Are the Implications of
Globalization for Monetary Policy?*
• Our conclusion is that globalization and trade
do reduce inflation in the short run.
• And just like any positive supply shock they
provide an opportunity to reduce inflation
permanently.
• Is globalization likely to have a sizeable impact
on inflation even in the short run?
• It is likely a modest impact.
• We can’t get away from the fact that changes
in domestic inflation are tied to domestic
monetary policy.
22-76
Can Policymakers Distinguish a Recessionary Gap from
a Fall in Potential Output?*
• In the early 1970s U.S. GDP growth began to
fall.
• In 1974 there was a severe recession but
inflation rose dramatically.
• When inflation is rising while output is falling,
the appropriate policy response depends on
whether potential output has fallen.
22-77
Can Policymakers Distinguish a Recessionary Gap from
a Fall in Potential Output?*
• Being able to distinguish a recessionary gap
from a fall in potential output is critical.
• The proximate cause of the 1970s episode was
a tripling of the price of oil.
• That increase in production costs translates into a
negative supply shock.
• But the right response depends on what
happened to potential output at the time.
22-78
Can Policymakers Distinguish a Recessionary Gap from
a Fall in Potential Output?*
• In retrospect we know that as oil prices rose:
• The productive capacity of the economy fell, and
• Potential output went down with it.
• At the time, policymakers didn't realize that.
• Instead, they thought lower output reflected a
recessionary gap.
• This led to an inappropriate response that drove
inflation up, where it stayed longer than it
should have.
22-79
Recessionary Output Gap
Recessionary output gap
caused by a negative
supply shock.
Policymakers focus on
returning inflation to
target.
They raise the interest rate
along an unchanged
monetary policy reaction
curve.
22-80
Can Policymakers Distinguish a Recessionary Gap from
a Fall in Potential Output?*
• If a negative supply shock is associated with a
decline in potential output, things are quite
different.
• The economy moves to point 1 as SRAS shifts
left.
• Inflation is higher and output is lower.
• There is an expansionary gap.
• Even though output has fallen, potential output
has fallen by more and output remains above
the new, lower, YP.
22-81
Fall in Potential Output
• Without any change in
the monetary policy
reaction curve, the
economy will move to
point 2.
22-82
Can Policymakers Distinguish a Recessionary Gap from
a Fall in Potential Output?*
• The challenge for policymakers is to figure out
that potential output has fallen and that this has
increased the long-run real interest rate.
• Keeping inflation at its target requires a
leftward shift in the monetary policy reaction
curve.
• Policymakers need to raise the real interest rate
by even more than they would in the case of a
recessionary gap.
22-83
Can Policymakers Distinguish a Recessionary Gap from
a Fall in Potential Output?*
22-84
• In order to set their policy-controlled interest
rate as accurately as possible, central bankers
need to know the size of the output gap.
• This requires measuring the level and growth
rate of both current and potential GDP
accurately.
• The practical implication of the statistical
discrepancy is that it makes us unsure about the
current level of real output.
22-85
22-86
Can Policymakers Stabilize Output
and Inflation Simultaneously?*
• Short run fluctuations in output and inflation
are caused by either demand shifts or supply
shifts.
• By shifting their monetary policy reaction
curve, policymakers offset demand shocks.
• Unfortunately, supply shocks are a different
story.
• There is no way to neutralize them.
22-87
Can Policymakers Stabilize Output
and Inflation Simultaneously?*
• Monetary policymakers can shift the dynamic
aggregate demand curve, but they are
powerless to move the SRAS curve.
• But, central bankers can choose how
aggressively they react to deviations of
inflation from their target caused by supply
shocks.
• They do this by picking the slope of their
monetary policy reaction curve, which
determines the slope of the AD curve.
22-88
Can Policymakers Stabilize Output
and Inflation Simultaneously?*
22-89
Can Policymakers Stabilize Output
and Inflation Simultaneously?*
• The more aggressively policymakers are
keeping current inflation close to target, the
steeper their monetary policy reaction curve,
• The flatter the AD curve.
• By controlling the slope of AD, policymakers
choose the extent to which supply shocks translate
into changes in output or changes in inflation.
• The more central bankers stabilize inflation,
the more volatile output will be, and vice versa.
• There is a trade-off.
22-90
Can Policymakers Stabilize Output
and Inflation Simultaneously?*
• A relatively flat AD curve implied by the steep
monetary policy reaction curve means:
• A supply shock creates large changes in current
output.
• A negative supply shock drives output down
sharply, opening up a large recessionary gap.
• This should force inflation down faster than a small
recessionary gap.
• Policymakers are counting on that mechanism when
they choose this path.
22-91
Can Policymakers Stabilize Output
and Inflation Simultaneously?*
• By reacting aggressively to supply shocks,
policymakers force current inflation back to
target quickly.
• The cost of following this path, however, is
that it causes output to fall substantially.
• Stable inflation means volatile output.
22-92
Can Policymakers Stabilize Output
and Inflation Simultaneously?*
• Panel B of Figure 22.14 shows what happens
when policy makers are less concerned about
keeping inflation close to target in the short
run.
• When policymakers worry about more shortrun fluctuations in output than about temporary
movements in inflation, they will choose a
relatively flat monetary policy reaction curve.
• The result is a steep AD curve.
22-93
Can Policymakers Stabilize Output
and Inflation Simultaneously?*
• In this case, inflation rises, creating a
recessionary output gap.
• But the output gap is small, so the downward
pressure on inflation is relatively weak.
• Inflation therefore adjusts slowly, remaining
high for a longer period than it would have if
policymakers had reacted more aggressively.
• Stable output means volatile inflation.
• Monetary policymakers face an inflationoutput volatility trade-off.
22-94
Can Policymakers Stabilize Output
and Inflation Simultaneously?*
22-95
• In mid-2008, the increase in oil prices to record
highs had put the Fed in a difficult spot.
• Inflation was rising while the economy was
declining.
• Should the Fed raise interest rates to cap
inflation or lower rates to avoid a deeper crisis
and recession?
• Uncertainty was very high.
22-96
• The ECB hiked its policy rate, but the Fed
stood pat, having cut the target federal funds
rate in several steps earlier in the year to 2
percent.
• But the September 2008 collapse of Lehman
Brothers intervened to drive both the global
economy and inflation sharply lower.
• By mid-December, the Fed had brought its
target rate near zero.
22-97
Stephen G. CECCHETTI • Kermit L. SCHOENHOLTZ
End of
Chapter Twenty-Two
Understanding Business Cycle
Fluctuations
McGraw-Hill/Irwin
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