Working Paper: NBER ID: w23788
Authors: Matthew Jaremski; Gabriel Mathy
Abstract: Outside of the recent past, excess reserves have only concerned policymakers in one other period: the Great Depression. The data show that excess reserves in the 1930s were never actively unwound through a reduction in the monetary base. Nominal economic growth swelled required reserves while an exogenous reduction in monetary gold inflows due to war embargoes in Europe allowed excess reserves to naturally decline towards zero. Excess reserves fell rapidly in early 1941 and would have unwound fully even without the entry of the United States into World War II. As such, policy tightening was at no point necessary and could have contributed to the 1937-1938 Recession.
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 |
|---|---|
| cessation of gold inflows (F32) | decline in excess reserves (E49) |
| gold inflows (F21) | excess reserves (E51) |
| cessation of gold inflows (F32) | natural reduction of excess reserves (H62) |
| Fed's contractionary policies (E52) | exacerbation of economic downturn of 1937-1938 (N12) |