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Fed's monetary policy mistake and the US post-COVID economic recovery

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  • Coutino, Alfredo

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.

Suggested Citation

  • Coutino, Alfredo, 2023. "Fed's monetary policy mistake and the US post-COVID economic recovery," Journal of Policy Modeling, Elsevier, vol. 45(3), pages 669-676.
    • Handle: RePEc:eee:jpolmo:v:45:y:2023:i:3:p:669-676
    DOI: 10.1016/j.jpolmod.2023.05.004
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    References listed on IDEAS

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    1. Coutiño, Alfredo, 2016. "Pitfalls in monetary policy decisions based on the output gap," Journal of Policy Modeling, Elsevier, vol. 38(1), pages 54-64.
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      More about this item

      Keywords

      Monetary policy; Central banking; Federal Reserve System; Output gap; Full employment; Inflation;
      All these keywords.

      JEL classification:

      • E23 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Production
      • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
      • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
      • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
      • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
      • J21 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Labor Force and Employment, Size, and Structure
      • O51 - Economic Development, Innovation, Technological Change, and Growth - - Economywide Country Studies - - - U.S.; Canada

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