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The Role of the Real Interest Rate in US Macroeconomic History

Listed author(s):
  • Ernst Juerg Weber

    (UWA Business School, The University of Western Australia)

A negative real interest rate has guaranteed macroeconomic equilibrium during every national emergency in the United States since the early 19th century, except the Great Depression in the 1930s when deflation interfered with the interest rate mechanism. During the Great Depression, the interest rate mechanism failed because the zero bound on the nominal interest rate implies that the real interest rate cannot be negative if there is deflation. This points to a monetary explanation of the Great Depression, and it suggests that central banks should suspend monetary policy rules that target inflation if there is an adverse political or economic shock that creates consumer pessimism.

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File URL: http://www.biz.uwa.edu.au/home/research/discussionworking_papers/economics?f=154229
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Paper provided by The University of Western Australia, Department of Economics in its series Economics Discussion / Working Papers with number 07-01.

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Length: 48 pages
Date of creation: 2007
Handle: RePEc:uwa:wpaper:07-01
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Web page: http://www.business.uwa.edu.au/school/disciplines/economics

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