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This paper explores the disconnect of Federal Reserve data from index number theory. A consequence could have been the decreased systemic-risk misperceptions that contributed to excess risk taking prior to the housing bust. The authors find that most recessions in the past 50 years were preceded by more contractionary monetary policy than indicated by simple-sum monetary data. Divisia monetary aggregate growth rates were generally lower than simple-sum aggregate growth rates in the period preceding the Great Moderation, and higher since the mid 1980s. Monetary policy was more contractionary than likely intended before the 2001 recession and more expansionary than likely intended during the subsequent recovery.
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