The contrast between "slow" & "fast"
which matches with the contrast between "bad" & "good" monetary policy
I will not be “foul mouthed” so I won´t mention “inflation”. After all, there are good things to write about. One of those is the full recovery in employment, at least for prime-age workers, only two years after the rout in employment brought about by the pandemic.
The chart contrasts the “slow” recovery in employment following the Great Recession, which took 11 years to complete, with the 2 years it took following the Covid19 pandemic.
For the skeptical, the next chart indicates that monetary policy, the lever that controls the behavior of aggregate nominal spending (NGDP), takes full responsibility for the contrasting outcomes.
As I´ll demonstrate shortly, the reason for the contrasting outcomes is due to Fed behavior. While the Bernanke Fed kept the economy “depressed” following the Great Recession, the Powell Fed was successful in quickly repositioning it “on trend” following the “Pandemic shock”.
”Good” monetary policy is one that changes the money supply to offset changes in velocity in order to keep NGDP on an “even keel” (see here for details).
We note, in the NGDP chart above, that before the GR, NGDP was very closely “attached” to the post 1987 trend path. After the GR, NGDP evolved closely attached to a lower trend path (that´s why I say BB kept the economy “depressed”). The point is that monetary policy was “good” for that “depressed” economy, in the sense monetary policy acted to offset changes in velocity, keeping NGDP growing stably.
The charts that follow show the different monetary “phases”. Before the GR, velocity was stable, and the attendant stable increase in money supply was what was required to maintain NGDP on a stable path.
The GR was the direct result of a significant drop in velocity that was not offset by an equivalent increase in money supply, which initially remained “pat” but fell when velocity began to rise back towards its trend level. The outcome was a permanent fall in the level of the stock of money or, in “thermostat analogy” terms, the economy´s “temperature” was set at a permanently “cooler” level.
When velocity tanked with the pandemic shock, money supply very quickly increased. With that, the economy´s “temperature” quickly “warmed” back up, allowing employment, for example, to recover rapidly!
The message for the Fed is clear. Do your best to obtain monetary equilibrium and, with that, gain Nominal Stability!