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- I. REVIEW OF GREAT DEPRESSION FACTS AND
L ECTURE 13 The Determinants of Macroeconomic Policy: The Great - - PowerPoint PPT Presentation
L ECTURE 13 The Determinants of Macroeconomic Policy: The Great - - PowerPoint PPT Presentation
Economics 210c/236a Christina Romer Fall 2011 David Romer L ECTURE 13 The Determinants of Macroeconomic Policy: The Great Depression November 30, 2011 I. R
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1929-01 1929-07 1930-01 1930-07 1931-01 1931-07 1932-01 1932-07 1933-01 1933-07 1934-01 1934-07 1935-01 1935-07 1936-01 1936-07 1937-01 1937-07 1938-01 1938-07 1939-01 1939-07 1940-01 1940-07 1941-01 1941-07
1 1.2 1.4 1.6 1.8 2 2.2 2.4
Industrial Production (Logarithms)
Industrial Production, 1929 to 1941
August 1929 March 1933 May 1937 June 1938
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Explanations
- Aggregate demand contraction
- Stock market crash
- Money supply contraction
- Credit contraction
- Increased nominal rigidity
- Supply-side stories
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- II. JONATHAN ROSE, “HOOVER’S TRUCE: WAGE
RIGIDITY IN THE ONSET OF THE GREAT DEPRESSION”
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1 2 3 4 5 6 7 8 9
01/03/1920 10/09/1920 07/16/1921 04/22/1922 01/27/1923 11/03/1923 08/09/1924 05/16/1925 02/20/1926 11/27/1926 09/03/1927 06/09/1928 03/16/1929 12/21/1929 09/27/1930 07/03/1931 04/09/1932 01/14/1933 10/28/1933 08/04/1934 05/11/1935 02/15/1936 11/21/1936 08/28/1937 06/04/1938 03/11/1939 12/16/1939 09/21/1940 06/27/1941
Commercial Paper Rate (Percent)
Commercial Paper Rate 1920-1941
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White House Press Statement Following the November 21, 1929 Conference
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Source: Rose, 2010.
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3 4 5 6 7 8 9 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24
Months following Peak
Decline in Industrial Production in 1920 and 1929
1929 1920
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Source: Rose, 2010.
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Source: Rose, 2010.
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- III. HSIEH AND ROMER, “WAS THE FEDERAL RESERVE
CONSTRAINED BY THE GOLD STANDARD DURING THE GREAT DEPRESSION? EVIDENCE FROM THE 1932 OPEN MARKET PURCHASE PROGRAM”
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Source: Hsieh and Romer, 2006.
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Indicators of Devaluation Expectations
- Forward exchange rate premium
- Did forward rates rise relative to spot rates?
- Interest rate differential
- Did U.S. interest rates rise relative to foreign?
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Source: Hsieh and Romer, 2006.
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Source: Hsieh and Romer, 2006.
Was the Fed worried about gold flows?
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Source: Hsieh and Romer, 2006.
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Source: Hsieh and Romer, 2006.
Role of Conflict Between Federal Reserve Banks
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Source: Hsieh and Romer, 2006.
Role of Ideas
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Source: Hsieh and Romer, 2006.
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- IV. HAROLD COLE AND LEE OHANIAN, “NEW DEAL
POLICIES AND THE PERSISTENCE OF THE GREAT DEPRESSION”
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Source: Chandler (1970)
Model NRA Code
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Source: Cole and Ohanian
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Source: Cole and Ohanian
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Source: Romer (1999)
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Source: Temin and Wigmore (1990)
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Source: Cole and Ohanian
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Does It Matter that Cole and Ohanian Don’t Explain Why Output Was So Low before the NRA?
- What does their analysis imply output growth would
have been in 1934 in the absence of the NRA?
- With nominal rigidity and i = 0, what are the effects of
a fall in potential output?
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Source: Eggertsson (2008)
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Source: Temin and Wigmore (1990)
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- V. GAUTI EGGERTSSON AND BENJAMIN PUGSLEY, “THE
MISTAKE OF 1937”
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Source: Friedman and Schwartz (1963)
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Source: Chandler (1970)
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The Key Elements of Eggertsson’s and Pugsley’s Proposed Explanation
- A change in expectations of future policy.
- The economy is incredibly sensitive to those
expectations: A change from a situation where “the public fully believes that the government is committed to targeting 4 percent inflation” to one where “the public thinks there is a 5 percent chance that the government will [adopt] a zero inflation goal within the next two years … results in a double-digit output collapse and deflation” (Eggertsson-Pugsley, p. 3).
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Other Theories of the Downturn
- Friedman and Schwartz: A largely conventional
monetary contraction caused by the increase in reserve requirements.
- Telser and others: A fiscal contraction.
- Cole and Ohanian and others: adverse supply
shocks, especially from unionization.
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Eggertsson and Pugsley’s Evidence
- Narrative evidence from statements and actions.
- Behavior of commodity prices.
- Hamilton’s and Cecchetti’s estimates of expected
inflation.
- The behavior of the economy when statements and
actions changed back.
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Source: Eggertsson and Pugsley
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Source: Eggertsson and Pugsley
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