Working Paper: NBER ID: w18746
Authors: Christina D. Romer; David H. Romer
Abstract: This paper examines an important gap in the monetary explanation of the Great Depression: the lack of a well-articulated and documented transmission mechanism of monetary shocks to the real economy. It begins by reviewing the challenge to Friedman and Schwartz's monetary explanation provided by the decline in nominal interest rates in the early 1930s. We show that the monetary explanation requires not just that there were expectations of deflation, but that those expectations were the result of monetary contraction. Using a detailed analysis of Business Week magazine, we find evidence that monetary contraction and Federal Reserve policy contributed to expectations of deflation during the central years of the downturn. This suggests that monetary shocks may have depressed spending and output in part by raising real interest rates.
Keywords: No keywords provided
JEL Codes: E32; E58; N12
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Monetary contraction (E59) | Expectations of deflation (E31) |
| Expectations of deflation (E31) | Real interest rates (E43) |
| Real interest rates (E43) | Spending (H61) |
| Real interest rates (E43) | Output (Y10) |
| Monetary contraction (E59) | Real interest rates (E43) |
| Expectations of deflation (E31) | Spending (H61) |
| Expectations of deflation (E31) | Output (Y10) |
| Monetary contraction (E59) | Spending (H61) |
| Monetary contraction (E59) | Output (Y10) |