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The impact of monetary policy in the midst of big shocks

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  • Ohanian, Lee E.

Abstract

This paper studies the impact of Federal Reserve policies that created the largest deviations from price stability during the Fed׳s first 100 years: the post-World War I deflation, the deflation of the Great Depression, the inflation of World War II, and the Great Inflation of the 1970s. In terms of their macroeconomic impacts, I find that deflation was uniquely depressing in the 1930s because of cartel policies that prevented nominal prices and wages from adjusting to clear markets, and not because deflation is generically depressing. I find that the biggest impact of monetary policy during World War II was in debasing debt through inflation. I find that the main drivers of the 1970s economy were long-run changes in productivity and the labor market, and that there may have been little that the Fed could have done at this time to expand employment and output. More broadly, I find that macroeconomic performance would have been better over the Fed׳s first century had the Fed followed a monetary policy to deliver stable prices.

Suggested Citation

  • Ohanian, Lee E., 2014. "The impact of monetary policy in the midst of big shocks," Journal of Economic Dynamics and Control, Elsevier, vol. 49(C), pages 35-48.
  • Handle: RePEc:eee:dyncon:v:49:y:2014:i:c:p:35-48
    DOI: 10.1016/j.jedc.2014.09.007
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    References listed on IDEAS

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    Cited by:

    1. Jordan Roulleau-Pasdeloup & Anastasia Zhutova, 2015. "Labor Market Policies and the "Missing Deflation" Puzzle: Lessons from Hoover Policies during the U.S Great Depression," Cahiers de Recherches Economiques du Département d'Econométrie et d'Economie politique (DEEP) 15.05, Université de Lausanne, Faculté des HEC, DEEP.
    2. Taylor, Jason E. & Neumann, Todd C., 2016. "Recovery Spring, Faltering Fall: March to November 1933," Explorations in Economic History, Elsevier, vol. 61(C), pages 54-67.

    More about this item

    Keywords

    Inflation; Federal reserve; Great depression; Deflation;

    JEL classification:

    • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles
    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
    • N2 - Economic History - - Financial Markets and Institutions

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