When Tight Is Too Tight: The Federal Reserve’s Response to the Post-World War II Spike in Inflation

Nicholas Croteau and Federico Mandelman
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Nicholas Croteau: https://www.atlantafed.org/research/economists/analysts/croteau-nicholas

Policy Hub, 2023, vol. 2023, issue 8, 9

Abstract: With the end of World War II, the massive expansion of defense spending came to a halt, and the money supply financing it quickly stabilized. However, the real money supply declined further with the transitory inflationary upswing of 1946–47, which fueled deflationary expectations, passively pushing up real interest rates and triggering the 1949 recession. We compare the Fed’s current stance to this historical episode, concluding that the ongoing tightening is already sufficient to normalize monetary conditions to prepandemic trends. This article also discusses how fiscal policy might affect "neutral" interest rates in this context.

Keywords: Money aggregates; inflation; World War II; neutral interest rates; fiscal policy (search for similar items in EconPapers)
JEL-codes: E6 N12 (search for similar items in EconPapers)
Date: 2023
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Persistent link: https://EconPapers.repec.org/RePEc:fip:a00068:97640

DOI: 10.29338/ph2023-8

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