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Inflation, Monetary Policy, and Long-Run Interest Rate Changes

Article Quant Q&A · Author: OCPatch
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Summary

The document discusses why U.S. interest rates were very high in the early 1980s and much lower in the period described by the question. Its response links the earlier episode to stagflation and Federal Reserve chair Paul Volcker’s efforts to curb inflation by tightening money supply through higher rates. It then connects the low-rate period after the 2008 crisis, and the later Covid shock, with weak borrowing and lending, reduced investment, and limited transmission from central-bank money creation into broader money supply.

To illustrate that transmission, the response points to changes in money aggregates and argues that growth in one measure does not necessarily imply comparable growth in another. It offers a qualitative explanation rather than a comprehensive account of inflation or interest-rate movements. The answer does not quantify the causes, distinguish all relevant periods, or present an empirical analysis; it also notes that the topic is difficult to answer with certainty. The discussion is therefore an introductory framework for further macroeconomic research, not a forecast or a trading signal.

Key ideas

  • The response associates early-1980s high rates with efforts to break stagflation and inflation.
  • Higher policy rates and reduced money supply are presented as tools used to restrain inflation.
  • It links post-crisis low rates to weak borrowing, lending, and investment activity.
  • Central-bank money creation may transmit unevenly into broader money aggregates over time.
  • The explanation is qualitative and does not provide a full causal or empirical account of long-run rates.

Tags

Fixed incomeUS marketsStatistics
Full text
# Why does the rate of inflation vary over time?


# Why does the rate of inflation vary over time?












Interest rates have varied significantly over the last 50+ years (source: https://www.macrotrends.net/2016/10-year-treasury-bond-rate-yield-chart ).

Is it possible to comprehensively and succinctly explain why interest rates went over 15% in the early 1980's in the U.S., but have been under 4% (sometimes flirting with 1.5% or less) for the last 10+ years?

What has changed about national and global economic factors to influence the general downward rate of economic inflation over the last 40 years?

## Answer by AKdemy (score 1)

https://quant.stackexchange.com/a/63997

Economics question yes. Also fairly easy to google. However, unless you are familiar with econ, finance etc it may not be clear where to search first.

FED chairman Paul Volker was responsible for these high interest rates. This was at a time of Stagflation, high inflation and slow growth. The link has some basic explanations but generally this is difficult to answer with certainty. Reducing money supply (raising interest rates) will break inflation. This link is clearer and it also worked under Paul Volker.

Since 2008 we have very low rates, due to a massive crisis (or crises now with Covid). Money supply by the FED (or any central bank) is only a fraction of total money supply. The money multiplier varies over time. If there is reluctance to borrow and lend, reduce investment spending and the like, total money supply is actually a lot less impacted. You can look up money aggregates like the ECBs- If you plot these, you will see although M1 expanded, M3 actually contracted (lower growth) in 2008 and stayed fairly low when compared historically.

You should find lots of research on this online, or ask economics.stackexchange.com.

Shown in full with attribution under the source's licence. Licence: CC BY-SA 4.0 (Stack Exchange)

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.