The Mistake of 1937: A General Equilibrium Analysis
AbstractThis paper studies a dynamic stochastic general equilibrium model with sticky prices and rational expectations in an environment of low interest rates and deflationary pressures. We show that small changes in the publicfs beliefs about the future inflation target of the government can lead to large swings in both inflation and output. This effect is much larger at low interest rates than under regular circumstances. This highlights the importance of effective communication policy at zero interest rates. We argue that confusing communications by the U.S. Federal Reserve, the President of the United States, and key administration officials about future price objectives were responsible for the sharp recession in the United States in 1937?38, one of the sharpest recessions in U.S. economic history. Poor communication policy is the mistake of 1937. Before committing the mistake of 1937, the U.S. policymakers faced economic conditions that are similar in some respects to those confronted by Japanese policymakers in the first half of 2006.
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Bibliographic InfoArticle provided by Institute for Monetary and Economic Studies, Bank of Japan in its journal Monetary and Economic Studies.
Volume (Year): 24 (2006)
Issue (Month): S1 (December)
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Deflation; Zero bound on interest rates; Regime changes; Great Depression;
Find related papers by JEL classification:
- E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
- E65 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Studies of Particular Policy Episodes
- N12 - Economic History - - Macroeconomics and Monetary Economics; Industrial Structure; Growth; Fluctuations - - - U.S.; Canada: 1913-
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