Expectations, monetary policy, and labor markets: lessons from the Great Depression

Christopher Phillip Reicher

No 1543, Kiel Working Papers from Kiel Institute for the World Economy (IfW Kiel)

Abstract: This paper estimates a series of shocks to hit the US economy during the Great Depression, using a New Keynesian model with unemployment and bargaining frictions. Shocks to long-run inflation expectations appear to account for much of the cyclical behavior of employment, while an increase in labor's bargaining power also played an important role in deepening and lengthening the Depression. Government spending played very little role during the Hoover Administration and New Deal, until the rise in military spending effectively brought an end to the Depression in 1941. With the economy at or near the zero interest rate bound, interest rates and monetary aggregates provided a misleading indicator as to the true stance of inflation expectations; in fact, conditions were deflationary all throughout the 1930s in spite of high money growth and low interest rates. The experience of the 1930s offers lessons to modern policymakers who find themselves in a similar situation.

Keywords: Great Depression; expectations; deflation; zero bound; liquidity trap (search for similar items in EconPapers)
JEL-codes: E24 E31 E52 E65 (search for similar items in EconPapers)
Date: 2009
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:zbw:ifwkwp:1543

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