Working Paper: NBER ID: w1987
Authors: Michael R. Darby; James R. Lothian
Abstract: Keynes' General Theory was a brilliant attempt to explain the paradox of low interest rates, ineffectual easy monetary policy, and low investment during the Great Depression. We argue that Keynes' failure to distinguish between low nominal and high real interest rates led him to misinterpret a tight and all too effective monetary policy and unnecessarily hypothesize a downward shift in investment demand. Keynesian ideas in turn profoundly influenced economic policy in the 1960s and 1970s. The resulting postwar inflation -- rather than scholarship on what actually happened in the 1930s -- appears to be the primary reason for the waning influence of the ideas derived from the General Theory.
Keywords: Keynesian ideas; Great Depression; monetary policy; inflation
JEL Codes: No JEL codes provided
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Keynes's failure to distinguish between nominal and real interest rates (E43) | misinterpretation of monetary policy's effectiveness during the Great Depression (E65) |
| misinterpretation of monetary policy's effectiveness during the Great Depression (E65) | negative impact on investment demand (E22) |
| Keynes's misinterpretation of monetary policy (E12) | post-World War II inflationary policies in the U.S. and the U.K. (E65) |
| Keynes's failure to understand the relationship between nominal and real rates (E43) | events of the Depression seemed less paradoxical (E65) |
| Keynes's misinterpretation of monetary policy (E12) | general theory might not have been written (B20) |
| subsequent empirical research refutes the notion of a loose but ineffective monetary policy during the Depression (E58) | monetary supply actually fell significantly during that period (E59) |