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Chronicle of a Deflation Unforetold

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  • François R. Velde

Abstract

Suppose that the nominal money supply could be cut literally overnight. What would happen to prices, wages, and output? Such an experiment was carried out three times in France in 1724, resulting in a cumulative 45 percent cut. Prices adjusted instantaneously and fully on the foreign exchange market. Prices of commodities and of manufactured goods and industrial wages fell slowly, over many months, and not by the full amount of the nominal reduction. The industrial sector experienced a contraction of 30 percent. When the government changed course and increased the nominal money supply overnight by 20 percent, prices responded more, and industry rebounded. (c) 2009 by The University of Chicago. All rights reserved..

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Bibliographic Info

Article provided by University of Chicago Press in its journal Journal of Political Economy.

Volume (Year): 117 (2009)
Issue (Month): 4 (08)
Pages: 591-634

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Handle: RePEc:ucp:jpolec:v:117:y:2009:i:4:p:591-634

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  1. Bordo, Michael D, 1995. "Is There a Good Case for a New Bretton Woods International Monetary System?," American Economic Review, American Economic Association, vol. 85(2), pages 317-22, May.
  2. François Velde, 2003. "Government equity and money: John Law’s system in 1720 France," Working Paper Series WP-03-31, Federal Reserve Bank of Chicago.
  3. Alogoskoufis, George S & Smith, Ron, 1991. "The Phillips Curve, the Persistence of Inflation, and the Lucas Critique: Evidence from Exchange-Rate Regimes," American Economic Review, American Economic Association, vol. 81(5), pages 1254-75, December.
  4. repec:spo:wpecon:info:hdl:2441/694 is not listed on IDEAS
  5. Glassman, Debra & Redish, Angela, 1988. "Currency depreciation in early modern England and France," Explorations in Economic History, Elsevier, vol. 25(1), pages 75-97, January.
  6. Guillaume Daudin, 2005. "France," Sciences Po publications info:hdl:2441/694, Sciences Po.
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Cited by:
  1. Joshua D. Angrist & J�rn-Steffen Pischke, 2010. "The Credibility Revolution in Empirical Economics: How Better Research Design Is Taking the Con out of Econometrics," Journal of Economic Perspectives, American Economic Association, vol. 24(2), pages 3-30, Spring.
  2. Young Sik Kim & Manjong Lee, 2011. "Unit of Account, Medium of Exchange, and Prices," Discussion Paper Series 1104, Institute of Economic Research, Korea University.

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