Recession, Stagnation, and Monetary Policy
By Amy Willis
What made the “Great Recession” great? How did its effects, and the policy responses prompted by it, differ from those seen with earlier recessions? This week’s EconTalk episode, with Stanford economist and Chairman of the NBER’s Business Cycle Dating division Robert Hall, explores why we haven’t seen a significant recovery in the wake of this most recent recession.
There’s been much discussion about the role of the Federal Reserve in the Great Recession, and Roberts and Hall begin there, exploring the question of whether the Fed acted too aggressively- or not aggressively enough- in response. Hall argues that the Obama administration’s stimulus package wasn’t effective, but for very different reasons than you might expect. Very little of the money went to the sort of “shovel-ready” projects touted, but instead went toward the debt obligations of state and local governments. For Hall, this suggests the federal government doesn’t have sufficient tools to induce local governments to spend, which is needed for any stimulus package to work.
Roberts and Hall have an extended discussion on the nature of interest rates and the influence of the Fed on them. (I’m reminded of this 2013 Feature Article by Jeffrey Rogers Hummel.) The conversation naturally turns to the influence of interest rates on reserves and real interest rates in the larger economy. What is the purpose of the excess reserves being held? Hall predicts the Fed will be phasing out these “old-fashioned” reserves in favor of the newer RRP reserves.
There’s a lot of macro to digest in this week’s episode, some rather technical. For those interested in more general topics, the conversation includes interesting take-aways as well. Roberts and Hall discuss the changing character of macroeconomics. (Hall coined the Saltwater/Freshwater distinction.) Hall argues that the idea of differing “schools” of macroeconomic thought has disappeared. Hall also shares (as much as he’s able!) how he and the rest of the NBER Business Cycle Dating committee work to determine the start and end of each recession. While today it’s more complicated than that, it turns out that looking for two consecutive quarters of declining GDP is still a good generalization, just like we all learned in class.