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Could Stable Money Have Averted The Great Contraction?

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  • Michael D. Bordo
  • Ehsan U. Choudhri
  • Anna J. Schwartz

Abstract

We test the hypothesis that the Great Contraction would have been attenuated had the Fed not allowed the money stock to decline. We do so by simulating a model that estimates separate relations for output and the price level and assumes that output and price dynamics are not especially sensitive to policy changes. The simulations include a strong and a weak form of Friedman's constant money growth rule. The results support the hypothesis that the Great Contraction would have been mitigated and shortened had the Fed followed a constant money growth rule.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 4481.

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Date of creation: Oct 1993
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Publication status: published as Economic Inquiry, vol. XXXIII, no. 3, pp. 484-505, (July 1995).
Handle: RePEc:nbr:nberwo:4481

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  1. Cecchetti, Stephen G & Karras, Georgios, 1994. "Sources of Output Fluctuations during the Interwar Period: Further Evidence on the Causes of the Great Depression," The Review of Economics and Statistics, MIT Press, vol. 76(1), pages 80-102, February.
  2. Ben S. Bernanke, 1983. "Non-Monetary Effects of the Financial Crisis in the Propagation of the Great Depression," NBER Working Papers 1054, National Bureau of Economic Research, Inc.
  3. Ben Bernanke & Frederic Mishkin, 1992. "Central Bank Behavior and the Strategy of Monetary Policy: Observations from Six Industrialized Countries," NBER Chapters, in: NBER Macroeconomics Annual 1992, Volume 7, pages 183-238 National Bureau of Economic Research, Inc.
  4. Christina D. Romer, 1991. "What Ended the Great Depression?," NBER Working Papers 3829, National Bureau of Economic Research, Inc.
  5. Bennett T. McCallum, 1993. "Unit Roots in Macroeconomic Time Series: Some Critical Issues," NBER Working Papers 4368, National Bureau of Economic Research, Inc.
  6. Ben Bernanke & Mark Gertler, 1987. "Financial Fragility and Economic Performance," NBER Working Papers 2318, National Bureau of Economic Research, Inc.
  7. Boughton, James M & Wicker, Elmus R, 1979. "The Behavior of the Currency-Deposit Ratio during the Great Depression," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 11(4), pages 405-18, November.
  8. Hafer, R.W. & Jansen, D.W., 1990. "The Demand For Money In The United States: Evidence From Cointegration Tests," Papers 9010, Erasmus University of Rotterdam - Institute for Economic Research.
  9. David C. Wheelock, 1992. "Monetary policy in the Great Depression: what the Fed did and why," Review, Federal Reserve Bank of St. Louis, issue Mar, pages 3-28.
  10. Bernanke, Ben & Gertler, Mark, 1989. "Agency Costs, Net Worth, and Business Fluctuations," American Economic Review, American Economic Association, vol. 79(1), pages 14-31, March.
  11. Milton Friedman & Anna Jacobson Schwartz, 1970. "Monetary Statistics of the United States: Estimates, Sources, Methods," NBER Books, National Bureau of Economic Research, Inc, number frie70-1, May.
  12. Hamilton, James D., 1987. "Monetary factors in the great depression," Journal of Monetary Economics, Elsevier, vol. 19(2), pages 145-169, March.
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Cited by:
  1. Rockoff, Hugh & White, Eugene N., 2012. "Monetary Regimes and Policy on a Global Scale: The Oeuvre of Michael D. Bordo," MPRA Paper 49672, University Library of Munich, Germany, revised May 2013.
  2. Michael D. Bordo & Barry Eichengreen, 1998. "Implications of the Great Depression for the Development of the International Monetary System," NBER Chapters, in: The Defining Moment: The Great Depression and the American Economy in the Twentieth Century, pages 403-454 National Bureau of Economic Research, Inc.
  3. Michael Bordo, 2000. "Sound Money and Sound Financial Policy," Journal of Financial Services Research, Springer, vol. 18(2), pages 129-155, December.
  4. Michael D. Bordo & Hugh Rockoff, 2013. "Not Just the Great Contraction: Friedman and Schwartz’s A Monetary History of the United States 1867 to 1960," NBER Working Papers 18828, National Bureau of Economic Research, Inc.
  5. Robert Rasche, 1995. "Pitfalls in counterfactual analyses of policy rules," Open Economies Review, Springer, vol. 6(3), pages 199-202, July.
  6. Douglas A. Irwin, 2011. "Gold Sterilization and the Recession of 1937-38," NBER Working Papers 17595, National Bureau of Economic Research, Inc.
  7. Lawrence J. Christiano & Roberto Motto, 2004. "The Great Depression and the Friedman-Schwartz Hypothesis," Computing in Economics and Finance 2004 169, Society for Computational Economics.
  8. Michael D. Bordo & Christopher J. Erceg & Charles L. Evans, 1997. "Money, sticky wages, and the Great Depression," Working Paper Series, Macroeconomic Issues WP-97-02, Federal Reserve Bank of Chicago.
  9. Galo Nuño & Pedro Tedde & Alessio Moro, 2011. "Money dynamics with multiple banks of issue: evidence from Spain 1856-1874," Banco de Espa�a Working Papers 1119, Banco de Espa�a.
  10. Martin Feldstein, 1993. "The Effect of Marginal Tax Rates on Taxable Income: A Panel Study of the1986 Tax Reform Act," NBER Working Papers 4496, National Bureau of Economic Research, Inc.
  11. Karras, Georgios & Lee, Jin Man & Stokes, Houston, 2006. "Why are postwar cycles smoother? Impulses or propagation?," Journal of Economics and Business, Elsevier, vol. 58(5-6), pages 392-406.

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