Working Paper: NBER ID: w17595
Authors: Douglas A. Irwin
Abstract: The Recession of 1937-38 is often cited as illustrating the dangers of withdrawing fiscal and monetary stimulus too early in a weak recovery. Yet our understanding of this severe downturn is incomplete: existing studies find that changes in fiscal policy were small in comparison to the magnitude of the downturn and that higher reserve requirements were not binding on banks. This paper focuses on a neglected change in monetary policy, the sterilization of gold inflows during 1937, and finds that it exerted a powerful contractionary force during this period. The transmission of this monetary shock to the real economy appears to have worked through lower asset (equity) prices and higher interest rates.
Keywords: gold sterilization; recession; monetary policy; 1937-38
JEL Codes: E5; N12
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Gold sterilization policy (E64) | Reduction in growth of the monetary base (E59) |
| Reduction in growth of the monetary base (E59) | Deceleration in growth of the money supply (E51) |
| Deceleration in growth of the money supply (E51) | Recession (E32) |
| Gold sterilization policy (E64) | Slowdown in monetary growth (O42) |
| Slowdown in monetary growth (O42) | Lower asset prices and higher interest rates (E43) |
| Lower asset prices and higher interest rates (E43) | Adverse effects on investment and consumption (E21) |
| Gold sterilization policy (E64) | Real GDP (E20) |