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Chronicles of a deflation unforetold

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  • François Velde

Abstract

Suppose the nominal money supply could be cut literally overnight by, say, 20%. What would happen to prices, wages, output? The answer can be found in 1720s France, where just such an experiment was carried out, repeatedly. Prices adjusted instantaneously and fully on one market only, that for foreign exchange. Prices on other markets (such as commodities) as well as prices of manufactured goods and industrial wages fell slowly, over many months, and not by the full amount of the nominal reduction. Coincidentally or not, the industrial sector (as represented by manufacturing of woolen cloths) experienced a contraction of 30%. When the government changed course and increased the nominal money supply overnight by 20%, prices responded much more, and the woolen industry rebounded.

Suggested Citation

  • François Velde, 2006. "Chronicles of a deflation unforetold," Working Paper Series WP-06-12, Federal Reserve Bank of Chicago.
  • Handle: RePEc:fip:fedhwp:wp-06-12
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    References listed on IDEAS

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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. 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.
    7. repec:eee:macchp:v2-2305 is not listed on IDEAS
    8. Young Sik Kim & Manjong Lee, 2011. "Unit of Account, Medium of Exchange, and Prices," Discussion Paper Series 1104, Institute of Economic Research, Korea University.
    9. Campbell Leith & Eric Leeper, 2016. "Understanding Inflation as a Joint Monetary-Fiscal Phenomenon," Working Papers 2016_01, Business School - Economics, University of Glasgow.
    10. Homburg, Stefan, 2017. "A Study in Monetary Macroeconomics," OUP Catalogue, Oxford University Press, number 9780198807537.
    11. 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.
    12. 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.

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    Keywords

    Deflation (Finance) ; Prices;

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