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The Role of the Real Interest Rate in US Macroeconomic History

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  • Ernst Juerg Weber

    (UWA Business School, The University of Western Australia)

Abstract

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.

Suggested Citation

  • Ernst Juerg Weber, 2007. "The Role of the Real Interest Rate in US Macroeconomic History," Economics Discussion / Working Papers 07-01, The University of Western Australia, Department of Economics.
  • Handle: RePEc:uwa:wpaper:07-01
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    File URL: http://www.biz.uwa.edu.au/home/research/discussionworking_papers/economics?f=154229
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    References listed on IDEAS

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    Cited by:

    1. Lee C. Spector & Courtenay C. Stone, 2010. "Suspicious Estimates of Ex Ante Real Interest Rates: Evidence of Macroeconomic Malpractice?," Working Papers 201010, Ball State University, Department of Economics, revised Oct 2010.

    More about this item

    JEL classification:

    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • N21 - Economic History - - Financial Markets and Institutions - - - U.S.; Canada: Pre-1913

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