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

Christina D. Romer and David Romer

American Economic Review, 2013, vol. 103, issue 3, 66-72

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.

JEL-codes: B31 E32 E43 E44 E58 G21 N12 (search for similar items in EconPapers)
Date: 2013
Note: DOI: 10.1257/aer.103.3.66
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Citations: View citations in EconPapers (25)

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