Chronicles of a deflation unforetold
Francois Velde ()
No WP-06-12, Working Paper Series from Federal Reserve Bank of Chicago
Abstract:
Suppose the nominal money supply could be cut literally overnight by, say, 20%. What would happen to prices, wages, output? The answer can be found in 1720s France, where just such an experiment was carried out, repeatedly. Prices adjusted instantaneously and fully on one market only, that for foreign exchange. Prices on other markets (such as commodities) as well as prices of manufactured goods and industrial wages fell slowly, over many months, and not by the full amount of the nominal reduction. Coincidentally or not, the industrial sector (as represented by manufacturing of woolen cloths) experienced a contraction of 30%. When the government changed course and increased the nominal money supply overnight by 20%, prices responded much more, and the woolen industry rebounded.
Keywords: Deflation (Finance); Prices (search for similar items in EconPapers)
Date: 2006
New Economics Papers: this item is included in nep-hpe, nep-mac and nep-mon
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Journal Article: Chronicle of a Deflation Unforetold (2009) 
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