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The price level, relative prices and economic stability: aspects of the interwar debate

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  • David Laidler

    (University of Western Ontario - Department of Economics)

Abstract

Recent financial instability has called into question the sufficiency of low inflation as a goal for monetary policy. This paper discusses interwar literature bearing on this question. It begins with theories of the cycle based on the quantity theory, and their policy prescription of price stability supported by lender of last resort activities in the event of crises, arguing that their neglect of fluctuations in investment was a weakness. Other approaches are then taken up, particularly Austrian theory, which stressed the banking system's capacity to generate relative price distortions and forced saving. This theory was discredited by its association with nihilistic policy prescriptions during the Great Depression. Nevertheless, its core insights were worthwhile, and also played an important part in Robertson's more eclectic account of the cycle. The latter, however, yielded activist policy prescriptions of a sort that were discredited in the postwar period. Whether these now need re-examination, or whether a low-inflation regime, in which the authorities stand ready to resort to vigorous monetary expansion in the aftermath of asset market problems, is adequate to maintain economic stability is still an open question.

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Bibliographic Info

Paper provided by Bank for International Settlements in its series BIS Working Papers with number 136.

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Length: 43 pages
Date of creation: Sep 2003
Date of revision:
Handle: RePEc:bis:biswps:136

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Keywords: price level; relative prices; economic stability; interwar debate;

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Cited by:
  1. Ioan Carabenciov & Charles Freedman & Roberto Garcia-Saltos & Douglas Laxton & Ondra Kamenik & Petar Manchev, 2013. "Gpm6," IMF Working Papers 13/87, International Monetary Fund.
    • Tamim Bayoumi & Hamid Faruqee & Douglas Laxton & Philippe D Karam & Alessandro Rebucci & Jaewoo Lee & Ben Hunt & Ivan Tchakarov, 2004. "Gem," IMF Occasional Papers 239, International Monetary Fund.
  2. Ehsan U. Choudhri & Lawrence L. Schembri, 2013. "A Tale of Two Countries and Two Booms, Canada and the United States in the 1920s and the 2000s: The Roles of Monetary and Financial Stability Policies," Working Paper Series, The Rimini Centre for Economic Analysis 44_13, The Rimini Centre for Economic Analysis.
  3. Philipp Bagus, 2008. "Monetary policy as bad medicine: The volatile relationship between business cycles and asset prices," The Review of Austrian Economics, Springer, Springer, vol. 21(4), pages 283-300, December.
  4. Igor Ermolaev & Michel Juillard & Ioan Carabenciov & Charles Freedman & Douglas Laxton & Ondra Kamenik & Dmitry Korshunov, 2008. "A Small Quarterly Projection Model of the US Economy," IMF Working Papers 08/278, International Monetary Fund.
  5. Jared Laxton & Igor Ermolaev & Charles Freedman & Ondra Kamenik & Michel Juillard & Douglas Laxton & Ioan Carabenciov & Dmitry Korshunov, 2008. "A Small Quarterly Multi-Country Projection Model," IMF Working Papers 08/279, International Monetary Fund.
  6. International Monetary Fund, 2009. "Adding Latin America to the Global Projection Model," IMF Working Papers 09/85, International Monetary Fund.
  7. Michael D. Bordo & David C. Wheelock, 2004. "Monetary policy and asset prices: a look back at past U.S. stock market booms," Review, Federal Reserve Bank of St. Louis, issue Nov, pages 19-44.
  8. Michel Bordo & John Lando-Lane, 2013. "Does Expansionary Monetary Policy Cause Asset Price Booms? Some Historical and Empirical Evidence," Working Papers Central Bank of Chile, Central Bank of Chile 710, Central Bank of Chile.
  9. Andreas Hoffmann, 2014. "Zero-Interest Rate Policy and Unintended Consequences in Emerging Markets," ICER Working Papers, ICER - International Centre for Economic Research 02-2014, ICER - International Centre for Economic Research.
  10. Michel Juillard & Charles Freedman & Dmitry Korshunov & Douglas Laxton & Ondra Kamenik & Ioan Carabenciov & Igor Ermolaev & Jared Laxton, 2008. "A Small Quarterly Multi-Country Projection Model with Financial-Real Linkages and Oil Prices," IMF Working Papers 08/280, International Monetary Fund.

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