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Hetzel “ Monetary Policy in the 2008-09 Recession”

Hetzel “ Monetary Policy in the 2008-09 Recession”. Vaughan / Economics 639. Hetzel in a Nutshell. Negative real shocks (hike in energy prices, decline in housing prices, etc.) tipped the economy into a moderate recession in December 2007.

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Hetzel “ Monetary Policy in the 2008-09 Recession”

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  1. Hetzel“Monetary Policy in the 2008-09 Recession” Vaughan / Economics 639

  2. Hetzel in a Nutshell • Negative real shocks (hike in energy prices, decline in housing prices, etc.) tipped the economy into a moderate recession in December 2007. • Fed “tightened” monetary policy out of fear of inflation, thereby turning a moderate recession into a severe one. • No reduction in Fed funds target from April 30th, 2008 until October 8th, 2008 – despite gathering evidence of a serious recession. • Hawkish statements by FOMC members in June caused expected future Fed funds to rise from 2.0% to 2.5% by November 2008. • RESULT: Largest decline in nominal GDP since the 1930s. • Implication: Financial crisis was endogenous response to severe recession.

  3. Hetzel in a Nutshell • Note large drop in nominal GDP growth. • Nominal GDP growth still low (i.e., tight money is the cause of anemic recovery).

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