Monetary policy frameworks and indicators for the Federal Reserve in the 1920s
The 1920s and 1930s saw the Fed reject a state-of-the-art empirical policy framework for a logically defective one. Consisting of a quantity theoretic analysis of the business cycle, the former framework featured the money stock, price level, and real interest rates as policy indicators. By contrast, the Fed’s procyclical needs-of-trade, or real bills, framework stressed such policy guides as market nominal interest rates, volume of member bank borrowing, and type and amount of commercial paper eligible for rediscount at the central bank. The start of the Great Depression put these rival sets of indicators to the test. The quantity theoretic set correctly signaled that money and credit were on sharply contractionary paths that would worsen the slump. By contrast, the real bills indicators incorrectly signaled that money and credit conditions were sufficiently easy and needed no correction. This experience shows that policy measures and measurement, no matter how accurate and precise, can lead policymakers astray when embodied in a theoretically flawed framework.
|Date of creation:||2000|
|Date of revision:|
|Contact details of provider:|| Web page: http://www.richmondfed.org/|
More information through EDIRC
|Order Information:|| Web: http://www.richmondfed.org/publications/ Email: |
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- O. M. W. Sprague, 1911. "Fisher's Purchasing Power of Money," The Quarterly Journal of Economics, Oxford University Press, vol. 26(1), pages 140-151.
- Meltzer, Allan H., 1976. "Monetary and other explanations of the start of the great depression," Journal of Monetary Economics, Elsevier, vol. 2(4), pages 455-471, November.
- Warren M. Persons, 1908. "The Quantity Theory as Tested by Kemmerer," The Quarterly Journal of Economics, Oxford University Press, vol. 22(2), pages 274-289.
When requesting a correction, please mention this item's handle: RePEc:fip:fedrwp:00-07. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Christian Pascasio)
If references are entirely missing, you can add them using this form.