Fifty years have passed since Milton Friedman delivered his groundbreaking American Economic Association Presidential address on the role of monetary policy. Unfortunately, many of Friedman’s insights are neglected today. Friedman demolished the view that the Federal Reserve was powerless to prevent the Great Depression. In fact, he showed that the Federal Reserve’s deliberately deflationary policies were to blame for turning a crash into a depression. One of Friedman’s great insights was that you cannot infer whether money is easy or tight by looking at interest rates alone.

As Friedman wrote in 1997, “Low interest rates are generally a sign that money has been tight, as in Japan; high interest rates, that money has been easy… After the US experience during the Great Depression, and after inflation and rising interest rates in the 1970s and disinflation and falling interest rates in the 1980s, I thought the fallacy of identifying tight money with high interest rates and easy money with low interest rates was dead. Apparently, old fallacies never die.”

Today’s conventional wisdom that monetary policy since the crisis has been expansionary and easy is mistaken. As no less of an authority than Ben Bernanke pointed out, nominal interest rates are unreliable indicators, and one should instead “check… by looking at macroeconomic indicators such as nominal GDP growth and inflation.”

But inflation, which the Bank of England targets, is an imperfect measure. It can be determined by both demand factors (which the Bank can control) and supply factors (which the bank can’t). For instance, an oil price shock can increase inflation in the short-term but a central bank shouldn’t raise rates in response. Policymakers on the MPC are trained to “look through” supply-shocks, and they did just that in 2015 when inflation fell due to oil prices collapsing.