Chronicles of a deflation unforetold
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.
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- Guillaume Daudin, 2005. "Commerce et prospérité : la France au XVIIIe siècle," Sciences Po publications 19, Sciences Po.
- François Velde, 2003. "Government equity and money: John Law’s system in 1720 France," Working Paper Series WP-03-31, Federal Reserve Bank of Chicago.
- Bordo, Michael D, 1995. "Is There a Good Case for a New Bretton Woods International Monetary System?," American Economic Review, American Economic Association, vol. 85(2), pages 317-22, May.
- Glassman, Debra & Redish, Angela, 1988. "Currency depreciation in early modern England and France," Explorations in Economic History, Elsevier, vol. 25(1), pages 75-97, January.
- Alogoskoufis, George S & Smith, Ron, 1991. "The Phillips Curve, the Persistence of Inflation, and the Lucas Critique: Evidence from Exchange-Rate Regimes," American Economic Review, American Economic Association, vol. 81(5), pages 1254-75, December.
- Guillaume Daudin, 2005. "France," Sciences Po publications info:hdl:2441/694, Sciences Po.
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