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Chronicle of a Deflation Unforetold

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  • François R. Velde

Abstract

Suppose that the nominal money supply could be cut literally overnight. What would happen to prices, wages, and output? Such an experiment was carried out three times in France in 1724, resulting in a cumulative 45 percent cut. Prices adjusted instantaneously and fully on the foreign exchange market. Prices of commodities and of manufactured goods and industrial wages fell slowly, over many months, and not by the full amount of the nominal reduction. The industrial sector experienced a contraction of 30 percent. When the government changed course and increased the nominal money supply overnight by 20 percent, prices responded more, and industry rebounded. (c) 2009 by The University of Chicago. All rights reserved.

Suggested Citation

  • François R. Velde, 2009. "Chronicle of a Deflation Unforetold," Journal of Political Economy, University of Chicago Press, vol. 117(4), pages 591-634, August.
  • Handle: RePEc:ucp:jpolec:v:117:y:2009:i:4:p:591-634
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    Cited by:

    1. Thomas J. Sargent, 2015. "Robert E. Lucas Jr.'s Collected Papers on Monetary Theory," Journal of Economic Literature, American Economic Association, vol. 53(1), pages 43-64, March.
    2. Joshua D. Angrist & Jörn-Steffen Pischke, 2010. "The Credibility Revolution in Empirical Economics: How Better Research Design Is Taking the Con out of Econometrics," Journal of Economic Perspectives, American Economic Association, vol. 24(2), pages 3-30, Spring.
    3. Ramey, V.A., 2016. "Macroeconomic Shocks and Their Propagation," Handbook of Macroeconomics, Elsevier.
    4. Jalil, Andrew J. & Rua, Gisela, 2016. "Inflation expectations and recovery in spring 1933," Explorations in Economic History, Elsevier, vol. 62(C), pages 26-50.
    5. Jalil, Andrew & Rua, Gisela, 2015. "Inflation Expectations and Recovery from the Depression in 1933: Evidence from the Narrative Record," Finance and Economics Discussion Series 2015-29, Board of Governors of the Federal Reserve System (U.S.).
    6. repec:rsr:supplm:v:65:y:2017:i:6:p:84-91 is not listed on IDEAS
    7. Velde, Francois R., 2016. "What We Learn from a Sovereign Debt Restructuring in France in 1721," Economic Perspectives, Federal Reserve Bank of Chicago, issue 5, pages 1-17.
    8. repec:eee:macchp:v2-2305 is not listed on IDEAS
    9. Young Sik Kim & Manjong Lee, 2011. "Unit of Account, Medium of Exchange, and Prices," Discussion Paper Series 1104, Institute of Economic Research, Korea University.
    10. Campbell Leith & Eric Leeper, 2016. "Understanding Inflation as a Joint Monetary-Fiscal Phenomenon," Working Papers 2016_01, Business School - Economics, University of Glasgow.
    11. Homburg, Stefan, 2017. "A Study in Monetary Macroeconomics," OUP Catalogue, Oxford University Press, number 9780198807537.
    12. Velde, Francois R., 2018. "The Neapolitan Banks in the Context of Early Modern Public Banks," Working Paper Series WP-2018-5, Federal Reserve Bank of Chicago.
    13. Velde, Francois R., 2017. "An Analysis of Revenues at the Comédie française, 1680-1793," Working Paper Series WP-2017-24, Federal Reserve Bank of Chicago.
    14. Emi Nakamura & Jón Steinsson, 2017. "Identification in Macroeconomics," NBER Working Papers 23968, National Bureau of Economic Research, Inc.

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