Working Paper: NBER ID: w3217
Authors: Dennis Hoffman; Robert H. Rasche
Abstract: This study investigates the equilibrium demand for narrowly defined monetary aggregate during the Great Depression. We find evidence in support of a stable demand for real balance, but no evidence in support of stable demand functions for real currency and real monetary base. This is consistent with the Friedman-Schwartz interpretation of this period.
We do not reject the hypothesis that the equilibrium demand for real Ml is stable between the pre and post WWII sample periods. We find that the "shift in the drift" of Ml velocity after 1945 and at the end of 1981 as well as the "shift in the drift" of currency and base velocities in 1981 is the image of corresponding "shift in the drift" of short-term interest rates. We interpret this as consistent with the hypothesis that the dramatic change in velocity patterns after WWII and in 1981 result from changes in inflationary expectations.
Keywords: money demand; Great Depression; monetary policy
JEL Codes: E51; E32
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| demand for money (E41) | real balances (F31) |
| shifts in Ml velocity (E41) | changes in inflationary expectations (E31) |
| shifts in Ml velocity (E41) | short-term interest rates (E43) |
| real personal income (D31) | demand for money (E41) |
| short-term interest rates (E43) | demand for money (E41) |
| economic conditions (E66) | demand for money (E41) |