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Could Stable Money Have Averted the Great Contraction?

  • Bordo, Michael D
  • Choudhri, Ehsan U
  • Schwartz, Anna J

The authors test the hypothesis that the Great Contraction would have been attenuated had the Federal Reserve not allowed the money stock to decline. They simulate a model that estimates separate relations for output and the price level and assumes that output and price dynamics are not especially sensitive to policy changes. The simulations include a strong and a weak form of Milton Friedman's constant money growth rule. The results support the hypothesis that the Great Contraction would have been mitigated and shortened had the Federal Reserve followed a constant money growth rule. Copyright 1995 by Oxford University Press.

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Article provided by Western Economic Association International in its journal Economic Inquiry.

Volume (Year): 33 (1995)
Issue (Month): 3 (July)
Pages: 484-505

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Handle: RePEc:oup:ecinqu:v:33:y:1995:i:3:p:484-505
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  1. Milton Friedman & Anna Jacobson Schwartz, 1970. "Monetary Statistics of the United States: Estimates, Sources, Methods," NBER Books, National Bureau of Economic Research, Inc, number frie70-1.
  2. Ben Bernanke & Mark Gertler, 1987. "Financial Fragility and Economic Performance," NBER Working Papers 2318, National Bureau of Economic Research, Inc.
  3. Bernanke, Ben & Gertler, Mark, 1989. "Agency Costs, Net Worth, and Business Fluctuations," American Economic Review, American Economic Association, vol. 79(1), pages 14-31, March.
  4. Christina D. Romer, 1991. "What Ended the Great Depression?," NBER Working Papers 3829, National Bureau of Economic Research, Inc.
  5. Stephen G. Cecchetti & Georgios Karras, 1992. "Sources of Output Fluctuations During the Interwar Period: Further Evidence on the Causes of the Great Depression," NBER Working Papers 4049, National Bureau of Economic Research, Inc.
  6. Bennett T. McCallum, 1993. "Unit roots in macroeconomic time series: some critical issues," Economic Quarterly, Federal Reserve Bank of Richmond, issue Spr, pages 13-44.
  7. Ben S. Bernanke, 1983. "Non-Monetary Effects of the Financial Crisis in the Propagation of the Great Depression," NBER Working Papers 1054, National Bureau of Economic Research, Inc.
  8. David C. Wheelock, 1992. "Monetary policy in the Great Depression: what the Fed did and why," Review, Federal Reserve Bank of St. Louis, issue Mar, pages 3-28.
  9. Ben Bernanke & Frederic Mishkin, 1992. "Central Bank Behavior and the Strategy of Monetary Policy: Observations from Six Industrialized Countries," NBER Chapters, in: NBER Macroeconomics Annual 1992, Volume 7, pages 183-238 National Bureau of Economic Research, Inc.
  10. Boughton, James M & Wicker, Elmus R, 1979. "The Behavior of the Currency-Deposit Ratio during the Great Depression," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 11(4), pages 405-18, November.
  11. Hafer, R.W. & Jansen, D.W., 1990. "The Demand For Money In The United States: Evidence From Cointegration Tests," Papers 9010, Erasmus University of Rotterdam - Institute for Economic Research.
  12. Hamilton, James D., 1987. "Monetary factors in the great depression," Journal of Monetary Economics, Elsevier, vol. 19(2), pages 145-169, March.
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