Under his leadership, both the conduct and the communication of monetary policy changed profoundly.13 With inflation by then in double figures, Volcker’s Fed applied a monetary restriction that caused a sudden rise in the level and the volatility of interest rates.
When I reflect on the view expressed by the Bank’s critics that the 1990-1991 recession, the slow recovery and the sharp deterioration in our fiscal situation were all caused by an excessively tight monetary policy in the late 1980s, I find it useful to ask what would have happened if monetary policy had in fact been less anti-inflationary in the late 1980s.