I would have called a monetary policy “loose” when the central bank lowers it’s interest rates and increases the monetary base through open market operations.
However, someone I spoke to recently claimed that the “tightness” of the monetary policy should be judged by it’s effect on the broad money supply. If the broad money supply is shrinking, it doesn’t matter how low interest rates are, how much the monetary base is growing, it’s still a “tight” monetary policy.
Is this fair?
I’ve always thought of policy as what the Fed is trying to accomplish, not what the actually happens. During the Great Depression, the Fed was arguably looser than it had ever been but other factors were more dominant. I would still classify the Fed’s policy as loose though. That’s just me.
The correct answer is ALL THE TIME. There is no way to compute the “real” interest rate so monetary policy is never correct. That is the problem with central planning the financial system.
Could it not be computed in terms of it’s effect on the broad money supply? If the broad money supply is contracting, the policy is “tight”, no matter what level the interest rates are or how fast the monetary base is expanding? Likewise if the broad money supply is expanding, the policy is “loose”?