This article is a reprint of a lecture—given in honor of Homer Jones—that examines the causes of the Long Boom. The author defines the Long Boom—1982 to the present—as the period of time in which the United States has known unprecedented economic stability. This period includes the first- and second-longest peacetime expansions in American history, separated by one relatively short and mild national recession.
William G. Dewald, the retiring Research director at the Federal Reserve Bank of St. Louis, focuses on the longer-term monetary relationships in historical data. He uses charts of 10-year average growth rates in the M2 monetary aggregate, nominal GDP, real GDP, and inflation to show that there is a consistent longer-term correlation between M2 growth, nominal GDP growth, and inflation—but not between such nominal variables and real GDP growth.
The author tests several hypotheses about the market’s reactions to changes in the Federal Reserve’s federal funds rate target. He finds that short-term rates and long-term rates responded differently to funds rate target changes when target changes were accompanied by a change in the discount rate.
Inflation can cause costly misallocation of resources as consumers seek to protect the purchasing power of their nominal assets. The author discusses the nature of these distortions—known as “shoe leather” costs—in a model where the demand for money is motivated by a “shopping-time” constraint.
follow @stlouisfed