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Could Stable Money Have Averted The Great Contraction?

  • Michael D. Bordo
  • Ehsan U. Choudhri
  • Anna J. Schwartz

We test the hypothesis that the Great Contraction would have been attenuated had the Fed not allowed the money stock to decline. We do so by simulating a model that estimates separate relations for output and the price level and assumes that output and price dynamics are not especially sensitive to policy changes. The simulations include a strong and a weak form of Friedman's constant money growth rule. The results support the hypothesis that the Great Contraction would have been mitigated and shortened had the Fed followed a constant money growth rule.

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File URL: http://www.nber.org/papers/w4481.pdf
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 4481.

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Date of creation: Oct 1993
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Publication status: published as Economic Inquiry, vol. XXXIII, no. 3, pp. 484-505, (July 1995).
Handle: RePEc:nbr:nberwo:4481
Note: ME
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  1. Milton Friedman & Anna Jacobson Schwartz, 1970. "Monetary Statistics of the United States: Estimates, Sources, Methods," NBER Books, National Bureau of Economic Research, Inc, number frie70-1, October.
  2. Romer, Christina D., 1992. "What Ended the Great Depression?," The Journal of Economic History, Cambridge University Press, vol. 52(04), pages 757-784, December.
  3. Bennett T. McCallum, 1993. "Unit Roots in Macroeconomic Time Series: Some Critical Issues," NBER Working Papers 4368, National Bureau of Economic Research, Inc.
  4. Ben Bernanke & Frederic Mishkin, 1992. "Central Bank Behavior and the Strategy of Monetary Policy: Observations from Six Industrialized Countries," NBER Chapters, in: NBER Macroeconomics Annual 1992, Volume 7, pages 183-238 National Bureau of Economic Research, Inc.
  5. Bernanke, Ben & Gertler, Mark, 1990. "Financial Fragility and Economic Performance," The Quarterly Journal of Economics, MIT Press, vol. 105(1), pages 87-114, February.
  6. Boughton, James M & Wicker, Elmus R, 1979. "The Behavior of the Currency-Deposit Ratio during the Great Depression," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 11(4), pages 405-18, November.
  7. David C. Wheelock, 1992. "Monetary policy in the Great Depression: what the Fed did and why," Review, Federal Reserve Bank of St. Louis, issue Mar, pages 3-28.
  8. Hamilton, James D., 1987. "Monetary factors in the great depression," Journal of Monetary Economics, Elsevier, vol. 19(2), pages 145-169, March.
  9. Bernanke, Ben & Gertler, Mark, 1989. "Agency Costs, Net Worth, and Business Fluctuations," American Economic Review, American Economic Association, vol. 79(1), pages 14-31, March.
  10. Ben S. Bernanke, 1983. "Non-Monetary Effects of the Financial Crisis in the Propagation of the Great Depression," NBER Working Papers 1054, National Bureau of Economic Research, Inc.
  11. Stephen G. Cecchetti & Georgios Karras, 1992. "Sources of Output Fluctuations During the Interwar Period: Further Evidence on the Causes of the Great Depression," NBER Working Papers 4049, National Bureau of Economic Research, Inc.
  12. Hafer, R W & Jansen, Dennis W, 1991. "The Demand for Money in the United States: Evidence from Cointegration Tests," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 23(2), pages 155-68, May.
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