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Overvalued: Swedish monetary policy in the 1930s

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  • Alexander Rathke
  • Tobias Straumann
  • Ulrich Woitek

Abstract

This paper reconsiders the role of monetary policy in Sweden’s strong recovery from the Great Depression. The Riksbank in the 1930s is sometimes seen as an example of a central bank that was relatively innovative in terms of the conduct of monetary policy. To consider this analytically, we estimate a small-scale, structural general equilibrium model of a small open economy using Bayesian methods. We find that the model captures the key dynamics of the period surprisingly well. Importantly, our findings suggest that Sweden avoided the worst excesses of the depression by conducting conservative rather than innovative monetary policy. We find that, by keeping the Swedish krona undervalued to replenish foreign reserves, Sweden’s exchange rate policy unintentionally contributed to the Swedish growth miracle of the 1930s, avoiding a major slump in 1932 and enabling the country to benefit quickly from the eventual recovery of world demand.

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Bibliographic Info

Paper provided by Department of Economics - University of Zurich in its series ECON - Working Papers with number 058.

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Date of creation: Dec 2011
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Handle: RePEc:zur:econwp:058

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Keywords: Small open economy models; exchange rate policy; structural estimation; Bayesian analysis; Great Depression;

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  1. Anna J. Schwartz, 1984. "Introduction to "A Retrospective on the Classical Gold Standard, 1821-1931"," NBER Chapters, in: A Retrospective on the Classical Gold Standard, 1821-1931, pages 1-22 National Bureau of Economic Research, Inc.
  2. Almunia, Miguel & Bénétrix, Agustín & Eichengreen, Barry & O Rourke, Kevin H. & Rua, Gisela, 2009. "From Great Depression to Great Credit Crisis: Similarities, Differences and Lessons," CEPR Discussion Papers 7564, C.E.P.R. Discussion Papers.
  3. Javier García-Cicco & Roberto Pancrazi & Martín Uribe, 2006. "Real Business Cycles in Emerging Countries?," NBER Working Papers 12629, National Bureau of Economic Research, Inc.
  4. Nooman Rebei & Steven Ambler & Ali Dib, 2004. "Taylor Rules in an Estimated Model of a Small Open Economy," 2004 Meeting Papers 378, Society for Economic Dynamics.
  5. Michael D. Bordo & Anna J. Schwartz, 1984. "A Retrospective on the Classical Gold Standard, 1821-1931," NBER Books, National Bureau of Economic Research, Inc, number bord84-1.
  6. Lars Jonung, 1984. "Swedish Experience under the Classical Gold Standard, 1873-1914," NBER Chapters, in: A Retrospective on the Classical Gold Standard, 1821-1931, pages 361-404 National Bureau of Economic Research, Inc.
  7. Frank Smets & Raf Wouters, 2002. "Openness, imperfect exchange rate pass-through and monetary policy," Working Paper Research 19, National Bank of Belgium.
  8. Malin Adolfson & Stefan Laseen & Jesper Lindé & Mattias Villani, 2005. "An estimated New Keynesian small open economy model," Proceedings, Board of Governors of the Federal Reserve System (U.S.).
  9. Barry Eichengreen, 1992. "Golden Fetters: The Gold Standard and the Great Depression, 1919-1939," NBER Books, National Bureau of Economic Research, Inc, number eich92-1.
  10. Carl E. Walsh, 2003. "Monetary Theory and Policy, 2nd Edition," MIT Press Books, The MIT Press, edition 2, volume 1, number 0262232316, December.
  11. Rabanal, Pau & Rubio-Ramirez, Juan F., 2005. "Comparing New Keynesian models of the business cycle: A Bayesian approach," Journal of Monetary Economics, Elsevier, vol. 52(6), pages 1151-1166, September.
  12. Hinkle, Lawrence E. & Monteil, Peter J. (ed.), 1999. "Exchange Rate Misalignment: Concepts and Measurement for Developing Countries," OUP Catalogue, Oxford University Press, number 9780195211269.
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