 Fed's monetary policy mistake and the US post-COVID economic recoveryAlfredo Coutino Journal of Policy Modeling, 2023, vol. 45, issue 3, 669-676 Abstract: This paper argues that the persistent inflation in the U.S. during the post-COVID economic recovery was mainly the result of the Fed’s policy mistake caused by an overestimation of the negative output gap. The paper shows that after a two-quarter contraction, the U.S. economy quickly rebounded and outpaced its potential output, thus remaining in overheating territory. However, policymakers prolonged the monetary expansion beyond the necessary, which contributed to fuel inflation for a more prolonged time. The policy mistake was the result of an inaccurate estimation of potential output. Based on an alternative estimation that uses full employment as a condition, this paper shows that the U.S. economy has been running with a positive output gap since mid-2021. The results illustrate that the Federal Reserve was well-behind the curve in an economy in overexpansion and with a galloping inflation escalating well-above the target. Keywords: Monetary policy; Central banking; Federal Reserve System; Output gap; Full employment; Inflation (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:eee:jpolmo:v:45:y:2023:i:3:p:669-676 DOI: 10.1016/j.jpolmod.2023.05.004 Access Statistics for this article Journal of Policy Modeling is currently edited by A. M. Costa More articles in Journal of Policy Modeling from Elsevier |
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