 The Mistake of 1937: A General Equilibrium AnalysisGauti Eggertsson and Benjamin Pugsley Monetary and Economic Studies, 2006, vol. 24, issue S1, 151-190 Abstract: This paper studies a dynamic stochastic general equilibrium model with sticky prices and rational expectations in an environment of low interest rates and deflationary pressures. We show that small changes in the public's beliefs about the future inflation target of the government can lead to large swings in both inflation and output. This effect is much larger at low interest rates than under regular circumstances. This highlights the importance of effective communication policy at zero interest rates. We argue that confusing communications by the U.S. Federal Reserve, the President of the United States, and key administration officials about future price objectives were responsible for the sharp recession in the United States in 1937?38, one of the sharpest recessions in U.S. economic history. Poor communication policy is the mistake of 1937. Before committing the mistake of 1937, the U.S. policymakers faced economic conditions that are similar in some respects to those confronted by Japanese policymakers in the first half of 2006. Keywords: Deflation; Zero bound on interest rates; Regime changes; Great Depression (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:ime:imemes:v:24:y:december:i:s1:p:151-190 Access Statistics for this article More articles in Monetary and Economic Studies from Institute for Monetary and Economic Studies, Bank of Japan Contact information at EDIRC. |
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