Reg Q and its Impact on Inflation and Credit

The podcast episode discusses the role of Regulation Q (Reg Q) in the inflation and credit dynamics of the 1970s. Reg Q, a banking regulation from the 1930s, placed a ceiling on deposit interest rates, impacting the ability of banks to compete for deposits. This led to disintermediation, with deposits flowing out of banks and causing credit crunches. The restriction on interest rates hindered the transmission of monetary policy, making deposits less attractive and suppressing savings. The resulting effects included a demand-side impact, with reduced savings and higher spending, as well as a supply-side impact, with credit constraints leading to decreased investment and output. The analysis suggests that both supply and demand factors played a role in the inflationary episodes of the 1970s, and that financial friction had an impact on supply. The removal of Reg Q in the early 1980s with two stages of deregulation facilitated the unwinding of these dynamics and the reduction of inflation.