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American Economic Review: Vol. 103 No. 3 (May 2013)

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The Missing Transmission Mechanism in the Monetary Explanation of the Great Depression

Article Citation

Romer, Christina D., and David H. Romer. 2013. "The Missing Transmission Mechanism in the Monetary Explanation of the Great Depression." American Economic Review, 103(3): 66-72.

DOI: 10.1257/aer.103.3.66

Abstract

This paper examines the missing transmission mechanism in Friedman's and Schwartz's monetary explanation of the Great Depression. We review the challenge provided by the decline in nominal interest rates in the early 1930s, and show that the monetary explanation requires not just that there were expectations of deflation, but that they were caused by 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 downturn. This suggests that monetary shocks may have depressed spending and output in part by raising real interest rates.

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Authors

Romer, Christina D. (U CA, Berkeley)
Romer, David H. (U CA, Berkeley)

JEL Classifications

B31: History of Economic Thought: Individuals
E32: Business Fluctuations; Cycles
E43: Interest Rates: Determination, Term Structure, and Effects
E44: Financial Markets and the Macroeconomy
E58: Central Banks and Their Policies
G21: Banks; Depository Institutions; Micro Finance Institutions; Mortgages
N12: Economic History: Macroeconomics and Monetary Economics; Industrial Structure; Growth; Fluctuations: U.S.; Canada: 1913-


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