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Could A Monetary Base Rule Have Prevented the Great Depression?

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  • Bennett T. McCallum

Abstract

This paper continues an ongoing investigation of the properties of a specific, quantitative, and operational rule for the conduct of monetary policy, a rule that specifies settings of the monetary base that are designed to keep nominal GNP growing smoothly at a noninflationary rate. Whereas previous studies have examined the rule's performance in the context of United States experience since World War II, the present paper is concerned with the period 1923-1941. Counterfactual historical simulations are conducted with the rule and a small model of nominal GNP determination, estimated with U.S. quarterly data for 1922-1941. Residuals from the estimated relationships serve as estimates of the behavioral shocks that occurred and accordingly are fed into the simulation process quarter by quarter. The simulation results indicate that nominal GNP would have been kept reasonably close to a steady 3 percent growth path over 1923-1941 if the rule had been in effect, in which case it is highly unlikely that real output and employment could have collapsed as they did during the 1930s.

Suggested Citation

  • Bennett T. McCallum, 1989. "Could A Monetary Base Rule Have Prevented the Great Depression?," NBER Working Papers 3162, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:3162
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    Cited by:

    1. Benk, Szilárd & Gillman, Max & Kejak, Michal, 2010. "A banking explanation of the US velocity of money: 1919-2004," Journal of Economic Dynamics and Control, Elsevier, vol. 34(4), pages 765-779, April.
    2. Caggiano, Giovanni & Castelnuovo, Efrem & Damette, Olivier & Parent, Antoine & Pellegrino, Giovanni, 2017. "Liquidity traps and large-scale financial crises," Journal of Economic Dynamics and Control, Elsevier, vol. 81(C), pages 99-114.
    3. Orphanides, Athanasios, 2003. "Historical monetary policy analysis and the Taylor rule," Journal of Monetary Economics, Elsevier, vol. 50(5), pages 983-1022, July.
    4. Jonathan Payne & Lawrence Uren, 2014. "Economic Policy and the Great Depression in a Small Open Economy," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 46(2-3), pages 347-370, March.
    5. Stark, Tom & Croushore, Dean, 1998. "Evaluating McCallum's Rule When Monetary Policy Matters," Journal of Macroeconomics, Elsevier, vol. 20(3), pages 451-485, July.
    6. Orphanides, Athanasios & Wieland, Volker, 2000. "Efficient Monetary Policy Design near Price Stability," Journal of the Japanese and International Economies, Elsevier, vol. 14(4), pages 327-365, December.
    7. Gillman M. & Siklos & P.L.Silver & J.L., 1996. "Money Velocity with Costly Credit," Department of Economics - Working Papers Series 515, The University of Melbourne.
    8. Danfeng Kong & Osamu Kamoike, "undated". "The stability condition of a forward looking Taylor rule," EAERG Discussion Paper Series 0705, School of Economics, University of Queensland, Australia.
    9. McNelis, Paul D. & Asilis, Carlos M., 2002. "Macroeconomic policy games and asset-price volatility in the EMS: a linear quadratic control analysis of France, Germany, Italy and Spain," Economic Modelling, Elsevier, vol. 19(1), pages 1-24, January.
    10. McCallum, Bennett T., 1999. "Issues in the design of monetary policy rules," Handbook of Macroeconomics,in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 23, pages 1483-1530 Elsevier.
    11. Damette, Olivier & Parent, Antoine, 2016. "Did the Fed follow an implicit McCallum rule during the Great Depression?," Economic Modelling, Elsevier, vol. 52(PA), pages 226-232.
    12. McNelis, Paul D. & Asilis, Carlos M., 1995. "Monetary policy games with broad money targets a linear quadratic control analysis of the U.S. and Japan," Journal of Economic Dynamics and Control, Elsevier, vol. 19(5-7), pages 1091-1111.
    13. Thornton, Saranna Robinson, 2000. "How do broader monetary aggregates and divisia measures of money perform in McCallum's adaptive monetary rule?," Journal of Economics and Business, Elsevier, vol. 52(1-2), pages 181-204.
    14. Levin, Andrew T., 2005. "Comment on: "Endogenous objectives and the evaluation of targeting rules for monetary policy"," Journal of Monetary Economics, Elsevier, vol. 52(5), pages 913-919, July.

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