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The FedÕs Reaction to the Stock Market During the Great Depression: Fact or Artefact?

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  • Pierre L. Siklos

    ()
    (Wilfrid Laurier University and Viessmann Research Centre Waterloo, Canada and The Rimini Centre for Economics Analysis, Italy.)

Abstract

A notable feature of the 1920s and 1930s is the volatility in several key macroeconomic aggregates, and this feature used to econometrically identify the reaction of the Fed to stock market developments. The volatility of economic activity may have contributed to deepening the divisions among policy-makers about how the Fed ought to respond to stock price developments. Relying on the technique of Rigobon (2003), volatility is used as an instrument to estimate the FedÕs response to the stock market. Other identification assumptions based on structural VARs produce compatible results. Fed behavior appeared to have changed following the stock market crash of 1929. Consistent with the Riefler-Burgess doctrine, interest rates and stock returns are negatively related. I conclude that, prior to the stock market crash of 1929, a form of benign neglect explains Fed behavior. Thereafter, the Fed reacts only slightly more aggressively to stock market developments.

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Paper provided by The Rimini Centre for Economic Analysis in its series Working Paper Series with number 33-07.

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Date of creation: Jul 2007
Date of revision: Jul 2007
Handle: RePEc:rim:rimwps:33-07

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Cited by:
  1. David Grreasley, 2010. "Cliometrics and Time Series Econometrics: Some Theory and Applications," Working Papers in Economics 10/56, University of Canterbury, Department of Economics and Finance.

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