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

Christina Romer and David Romer

No 18746, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: This paper examines an important gap in the monetary explanation of the Great Depression: the lack of a well-articulated and documented transmission mechanism of monetary shocks to the real economy. It begins by reviewing the challenge to Friedman and Schwartz's monetary explanation provided by the decline in nominal interest rates in the early 1930s. We show that the monetary explanation requires not just that there were expectations of deflation, but that those expectations were the result of 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 central years of the downturn. This suggests that monetary shocks may have depressed spending and output in part by raising real interest rates.

JEL-codes: E32 E58 N12 (search for similar items in EconPapers)
Date: 2013-01
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
Note: DAE EFG ME
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Citations: View citations in EconPapers (21)

Published as Christina D. Romer & David H. Romer, 2013. "The Missing Transmission Mechanism in the Monetary Explanation of the Great Depression," American Economic Review, American Economic Association, vol. 103(3), pages 66-72, May.

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