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The Role of the Real Interest Rate in US Macroeconomic History

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Author Info
Ernst Juerg Weber (UWA Business School, The University of Western Australia)

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Abstract

A negative real interest rate has guaranteed macroeconomic equilibrium during every national emergency in the United States since the early 19th century, except the Great Depression in the 1930s when deflation interfered with the interest rate mechanism. During the Great Depression, the interest rate mechanism failed because the zero bound on the nominal interest rate implies that the real interest rate cannot be negative if there is deflation. This points to a monetary explanation of the Great Depression, and it suggests that central banks should suspend monetary policy rules that target inflation if there is an adverse political or economic shock that creates consumer pessimism.

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Paper provided by The University of Western Australia, Department of Economics in its series Economics Discussion / Working Papers with number 07-01.

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Length: 48 pages
Date of creation: 2007
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Handle: RePEc:uwa:wpaper:07-01

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Find related papers by JEL classification:
D91 - Microeconomics - - Intertemporal Choice and Growth - - - Intertemporal Consumer Choice; Life Cycle Models and Saving
E21 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
G12 - Financial Economics - - General Financial Markets - - - Asset Pricing
N21 - Economic History - - Financial Markets and Institutions - - - U.S.; Canada: Pre-1913

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    Other versions:
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    Other versions:
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    Other versions:
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    Other versions:
  10. Jung, Taehun & Teranishi, Yuki & Watanabe, Tsutomu, 2005. "Optimal Monetary Policy at the Zero-Interest-Rate Bound," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 37(5), pages 813-35, October.
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