What happened
A new paper finds that US central bank actions in the 1970s cut the economy's ability to produce goods and services. This happened because old banking rules forced money out of banks, making it harder for businesses to get loans.
Why it matters
For decades, economists mostly thought that when the US central bank raised interest rates, it only cooled demand. This paper shows that under specific financial conditions, like the banking rules of the 1970s, those actions also cut the economy's ability to produce. This means central banks might need to consider how their policies affect the supply side, especially when financial systems are under stress.