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The Role of the Real Interest Rate in U.S. Macroeconomic History

  • Weber Ernst Juerg

    ()

    (University of Western Australia)

People who face adverse economic prospects save in order to maintain consumption. During wars and other periods of distress, the incentive to save was so strong that there would have been excess saving and a corresponding excess supply of commodities without a negative real interest rate. During the Great Depression, the interest rate mechanism failed to achieve macroeconomic equilibrium because the nominal interest rate could not fall further and deflation produced a positive real interest rate. The lesson from American economic history is that central banks should accept moderate inflation if an adverse political or economic shock causes consumer pessimism.

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Article provided by De Gruyter in its journal The B.E. Journal of Macroeconomics.

Volume (Year): 10 (2010)
Issue (Month): 1 (April)
Pages: 1-26

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Handle: RePEc:bpj:bejmac:v:10:y:2010:i:1:n:7
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