Tuesday, June 5, 2012

Does Loose Money Lower or Raise Nominal Interest Rates?

Scott Sumner always quotes Milton Friedman who said something to the effect of "low nominal interest rates indicate that money has been tight, high rates that money has been loose."

I take it by this he was going by the Fisher Equation i = r + π e

Where "loose" money cause expected inflation to rise and hence nominal interest rates; "tight" money does the opposite, while the real interest rate stay constant at the loanable funds equilbrium.

I'd like to do some statistical testing for this hypothesis, and might sometime soon. For now, here is a crude plotting of the M2 money aggregate, percent change year by year, with the 10 year nominal Treasury rate. Enjoy.

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