A world in economic crisis

Reviewing the “Too Low For Too Long” Evidence

Posted in Uncategorized by Aussie on October 20, 2013

John B Taylor provides evidence that keeping interest rates too low exacerbates a housing boom. It will be interesting to see if this also holds true in Australia because our interest rates are at an historic low.

Economics One

In her  article “Alan Greenspan: What Went Wrong” in the Wall Street Journal Alexandra Wolfe considers whether monetary policy played a role in exacerbating the housing boom going into the financial crisis by holding interest rates “too low for too long.” I’ve argued that it did  (along with regulatory lapses) and wrote about it in a 2007 Jackson Hole paper.

Alan Greenspan disagrees with that paper, as Alexandra Wolfe reports, but she also reports that “Prof. Taylor stands by the paper in which he presented the idea. ‘The paper provided empirical evidence…that unusually low interest rates set by the Fed in 2003-2005 compared with policy decisions in the prior two decades exacerbated the housing boom,’ he wrote in an email. Other economists have corroborated the findings, he added, and ‘the results are quite robust.'”

Understandably, there’s not enough space in such an article to list the corroborations that…

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