Overvalued: Swedish monetary policy in the 1930s
AbstractThis 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 InfoPaper provided by Department of Economics - University of Zurich in its series ECON - Working Papers with number 058.
Date of creation: Dec 2011
Date of revision:
Small open economy models; exchange rate policy; structural estimation; Bayesian analysis; Great Depression;
Other versions of this item:
- C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
- E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
- F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
- N14 - Economic History - - Macroeconomics and Monetary Economics; Industrial Structure; Growth; Fluctuations - - - Europe: 1913-
This paper has been announced in the following NEP Reports:
- NEP-ALL-2012-01-18 (All new papers)
- NEP-CBA-2012-01-18 (Central Banking)
- NEP-HIS-2012-01-18 (Business, Economic & Financial History)
- NEP-HPE-2012-01-18 (History & Philosophy of Economics)
- NEP-MON-2012-01-18 (Monetary Economics)
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