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Price Flexibility, Credit Rationing, and Economic Fluctuations: Evidence from the U.S., 1879-1914


  • Charles W. Calomiris
  • R. Glenn Hubbard


The reawakening of interest in links between price flexibility and fluctuations in economic activity calls for a reconsideration of models of price and quantity adjustment. We examine relationships between credit disturbances and real activity under flexible prices, using monthly data on real and financial variables over the period from 1879-1914. Recent theoretical and empirical work has focused on models and institutions of the post World War II period. Historical episodes of pronounced business cycles, however, challenge our present formulations of the causes of fluctuations in output and employment. In this paper we pursue two goals: (i) to demonstrate that substantial price flexibility existed during the period to point out that models of economic fluctuations relying on sticky prices are not appropriate for analyzing the period, and (ii) to consider the effects of deflationary shocks on real variables in such a world. Our principal findings are two. First, we present evidence from several empirical tests to corroborate the stylized fact of price flexibility during our period of study (relative to patterns of flexibility observed in postwar data). Contrary to conclusions of many models applied to postwar data, we find that shocks to inflation rates produce positive and persistent effects on output.Second, extending earlier examinations of credit rationing as an outcome under imperfect information, we motivate this link by considering the impact of deflation on credit availability. The addition of measures of credit rationing accompanying deflation contributes substantially to our empirical explanation of output fluctuations during the period.

Suggested Citation

  • Charles W. Calomiris & R. Glenn Hubbard, 1985. "Price Flexibility, Credit Rationing, and Economic Fluctuations: Evidence from the U.S., 1879-1914," NBER Working Papers 1767, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:1767
    Note: EFG ME

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    References listed on IDEAS

    1. Taylor, John B, 1979. "Staggered Wage Setting in a Macro Model," American Economic Review, American Economic Association, vol. 69(2), pages 108-113, May.
    2. John A. James, 1985. "Shifts in the Nineteenth-Century Phillips Curve Relationship," NBER Working Papers 1587, National Bureau of Economic Research, Inc.
    3. Martin Neil Baily, 1978. "Stabilization Policy and Private Economic Behavior," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 9(1), pages 11-60.
    4. Carlton, Dennis W, 1979. "Contracts, Price Rigidity, and Market Equilibrium," Journal of Political Economy, University of Chicago Press, vol. 87(5), pages 1034-1062, October.
    5. Bernanke, Ben S, 1981. "Bankruptcy, Liquidity, and Recession," American Economic Review, American Economic Association, vol. 71(2), pages 155-159, May.
    6. Bernanke, Ben S, 1983. "Nonmonetary Effects of the Financial Crisis in Propagation of the Great Depression," American Economic Review, American Economic Association, vol. 73(3), pages 257-276, June.
    7. Lucas, Robert E, Jr, 1973. "Some International Evidence on Output-Inflation Tradeoffs," American Economic Review, American Economic Association, vol. 63(3), pages 326-334, June.
    8. Victor Zarnowitz, 1984. "Recent Work on Business Cycles in Historical Perspective: Review of Theories and Evidence," NBER Working Papers 1503, National Bureau of Economic Research, Inc.
    9. Harry G. Brown, 1910. "Commercial Banking and the Rate of Interest," The Quarterly Journal of Economics, Oxford University Press, vol. 24(4), pages 743-749.
    10. Blinder, Alan S, 1987. "Credit Rationing and Effective Supply Failures," Economic Journal, Royal Economic Society, vol. 97(386), pages 327-352, June.
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