Two centuries of historical data from three countries show that erratic monetary policy gives rise to erratic economic behavior, according to new research conducted by a noted Fordham University business faculty member.
In his paper “Monetary Policy and the Twin Crises,” Lothian argues that the financial crisis in the United States and the subsequent debt crisis in Europe were precipitated in part by Federal Reserve and European Central Bank policies that he called “too expansive.”
“The Fed kept interest rates too low for too long, thus feeding the housing boom,” Lothian wrote in an explanation of his paper.
His study of about 200 years of data for the United States, the United Kingdom and the Netherlands showed there is a positive correlation between fluctuations in real gross domestic product and prices.
“Higher volatility in the one is accompanied by higher volatility, not as thought lower, volatility in the other,” Lothian explained.
The source of that volatility, according to Lothian, was volatility in monetary behavior.
Lothian served as editor of the Journal of International Money and Finance for 26 years, ending his tenure in 2012. The journal publishes work of economists and finance specialist from around the world, including major research universities, teaching-oriented universities, central banks and private financial institutions.
Lothian has taught at Fordham since 1990.