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Abstract:
This paper examines the role of aggregate demand stimulus in ending the Great Depression. A simple calculation indicates that nearly all of the observed recovery of the U.S. economy prior to 1942 was due to monetary expansion. Huge gold inflows in the mid- and late-1930s swelled the U.S. money stock and appear to have stimulated the economy by lowering real interest rates and encouraging investment spending and purchases of durable goods. The finding that monetary developments were crucial to the recovery implies that self-correction played little role in the growth of real output between 1933 and 1942.

Abstract:
This paper analyzes the contributions of monetary and fiscal policy to postwar economic recoveries. We find that the Federal Reserve typically responds to downturns with prompt and large reductions in interest rates. Discretionary fiscal policy, in contrast, rarely reacts before the trough in economic activity, and even then the responses are usually small. Simulations using multipliers from both simple regressions and a large macroeconomic model show that the interest rate falls account for nearly all of the above-average growth that occurs early in recoveries. Our estimates also indicate that on several occasions expansionary policies have contributed substantially to above-normal growth outside of recoveries. Finally, the results suggest that the persistence of aggregate output movements is largely the result of the extreme persistence of the contribution of policy changes.

Abstract:
This paper argues that the collapse of stock prices in October 1929 generated temporary uncertainty about future income which caused consumers to forego purchases of durable and semidurable goods in late 1929 and much of 1930. Evidence that the stock market crash generated uncertainty is provided by the decline in confidence expressed by contemporary forecasters. Evidence that this uncertainty affected consumer behavior is provided by the fact that spending on consumer durables and semidurables declined immediately following the Great Crash and by the fact that there is a negative historical relationship between stock market variability and the production of consumer durables in the prewar era.

Abstract:
This paper investigates the impact of changes in the level of taxation on economic activity. We use the narrative record -- presidential speeches, executive-branch documents, and Congressional reports -- to identify the size, timing, and principal motivation for all major postwar tax policy actions. This narrative analysis allows us to separate revenue changes resulting from legislation from changes occurring for other reasons. It also allows us to further separate legislated changes into those taken for reasons related to prospective economic conditions, such as countercyclical actions and tax changes tied to changes in government spending, and those taken for more exogenous reasons, such as to reduce an inherited budget deficit or to promote long-run growth. We then examine the behavior of output following these more exogenous legislated changes. The resulting estimates indicate that tax increases are highly contractionary. The effects are strongly significant, highly robust, and much larger than those obtained using broader measures of tax changes. The large effect stems in considerable part from a powerful negative effect of tax increases on investment. We also find that legislated tax increases designed to reduce a persistent budget deficit appear to have much smaller output costs than other tax increases.

Abstract:
The question of how monetary policy affects the real economy is a perennial one in macroeconomics. Over the past several decades, however, the focus of the debate has changes. Today it is taken for granted that monetary policy affects aggregate demand; what is debated is why prices do not adjust fully to compensate for shifts in demand. Thirty years ago, in contrast, sluggish price adjustment was taken for granted; what was debated was the magnitude of the effect of monetary policy on aggregate demand and the channels through which that effect occurred.

This paper returns to the subject of that older literature. A fresh look at the way monetary policy affects aggregate demand is particularly timely in light of recent developments in theoretical analyses of credit markets. Work over the past 15 years has suggested that imperfections are a central feature of capital markets, and that these imperfections can cause credit allocation to be made largely on the basis of quantity rationing rather than price adjustment and can create a special role for lending by financial intermediaries. This work has also shown that credit market imperfections can have important consequences for macroeconomic fluctuations in general and for the way monetary policy is transmitted to aggregate demand in particular.

Abstract:
This paper analyzes changes in American business cycles over the twentieth century and suggests a possible explanation for the major changes that have and have not occurred. The empirical analysis shows that the volatility of annual real macroeconomic indicators and the average severity of recessions have declined only slightly between the pre-World War I and post-World War II eras. Recessions have, however, become somewhat less frequent and more uniform. The paper goes on to suggest that the advent of macroeconomic policy after World War II can account for both the continuity and the changes in business cycles. Countercyclical monetary policy and automatic stabilizers have prolonged postwar expansions and prevented severe depressions. At the same time, policy-induced booms and recessions have led to the continued volatility of the postwar economy.

Abstract:
This paper uses the historical record to isolate episodes in which there were large monetary disturbances not caused by output fluctuations. It then tests whether these monetary changes have important real effects. The central part of the paper is a study of postwar U.S. monetary history. We identify six episodes in which the Federal Reserve in effect decided to attempt to create a recession to reduce inflation. We find that a shift to anti-inflationary policy led, on average, to a rise in the unemployment rate of two percentage points, and that this effect is highly statistically significant and robust to a variety of changes in specification.

We reach three other major conclusions. First, the real effects of these monetary disturbances are highly persistent. Second, the six shocks that we identify account for a considerable fraction of postwar economic fluctuations. And third, evidence from the interwar era also suggests that monetary disturbances have large real effects.

Abstract:
There have been large changes in the conduct of aggregate demand policy in the United States over the past fifty years. This paper shows that these changes in policy have resulted largely from changes in policymakers' beliefs about the functioning of the economy and the effects of policy. We document the changes in beliefs using contemporaneous discussions of the economy and policy by monetary and fiscal policymakers and, for the period since the late 1960s, using the Federal Reserve's internal forecasts. We find that policymakers' understanding of the economy has not exhibited steady improvement. Instead, the evidence reveals an evolution from a fairly crude but basically sound worldview in the 1950s, to a more sophisticated but deeply flawed model in the 1960s, to uncertainty and fluctuating beliefs in the 1970s, and finally to the modern worldview of the 1980s and 1990s. We establish a link between policymakers' beliefs and aggregate demand policy by examining narrative evidence on the motivation for key policy choices. We also compare monetary policymakers' choices with the implications of a modern estimated policy rule and show that the main differences are consistent with the changes in beliefs that we observe.

Abstract:
The hypothesis that decreases in taxes reduce future government spending is often cited as a reason for cutting taxes. However, because taxes change for many reasons, examinations of the relationship between overall measures of taxation and subsequent spending are plagued by problems of reverse causation and omitted variable bias. To deal with these problems, this paper examines the behavior of government expenditures following legislated tax changes that narrative sources suggest are largely uncorrelated with other factors affecting spending. The results provide no support for the hypothesis that tax cuts restrain government spending; indeed, they suggest that tax cuts may actually increase spending. The results also indicate that the main effect of tax cuts on the government budget is to induce subsequent legislated tax increases. Examination of four episodes of major tax cuts reinforces these conclusions.

Abstract:
Monetary policy in the United States in the 1950s was remarkably modern. Analysis of Federal Reserve records shows that policymakers had an overarching aversion to inflation and were willing to accept significant costs to prevent it from rising to even moderate levels. This aversion to inflation was the result of policymakers' beliefs that higher inflation could not raise output in the long run, that the level of output that would trigger increases in inflation was only moderate, and that inflation had large real costs in the medium and long runs. Furthermore, both narrative and empirical analysis indicates that policymakers were not wedded to free reserves or other faulty indicators in their implementation of policy. Empirical estimates of a forward-looking Taylor rule show that policymakers in the 1950s raised nominal interest rates more than one-for-one with increases in expected inflation, and suggests that monetary policy in the 1950s was more similar to policy in the 1980s and 1990s than to that in the late 1960s and 1970s. One implication of these findings is that the inflation of the late 1960s and 1970s must have been the result of a change in the conduct of policy.

Abstract:
A key question about the Great Depression is whether expansionary monetary policy in the United States would have led to a loss of confidence in the U.S. commitment to the gold standard. This paper uses the $1 billion expansionary open market operation undertaken in the spring of 1932 as a crucial case study of the link between monetary expansion and expectations of devaluation. Data on forward exchange rates are used to measure expectations of devaluation during this episode. We find little evidence that the large monetary expansion led investors to believe that the United States would devalue. The financial press and the records of the Federal Reserve also show little evidence of expectations of devaluation or fear of a speculative attack. We find that a flawed model of the effects of monetary policy and conflict among the twelve Federal Reserve banks, rather than concern about the gold standard, led the Federal Reserve to suspend the expansionary policy in the summer of 1932.

Abstract:
This paper uses the lessons of history to identify the sources of monetary policy successes and failures in the past and to suggest a strategy for choosing successful Federal Reserve chairs in the future. It demonstrates that since at least the mid-1930s, the key determinant of the quality of monetary policy has been policymakers' beliefs about how the economy functions and what monetary policy can accomplish. When the Federal Reserve chairman and other policymakers have believed that inflation is costly, that inflation responds to the deviation of output from a moderate estimate of capacity, and that monetary policy can affect output and prices, as was the case in the 1950s and the 1980s and beyond, policy was well tempered and macroeconomic outcomes were desirable. When policymakers held other beliefs, such as the view that monetary policy cannot stimulate a depressed economy or that slack is ineffective in reducing inflation, as was the case in the 1930s and the 1970s, policy and outcomes were undesirable. This finding suggests that the key characteristic to look for in future Federal Reserve chairs is a sound economic framework. The paper shows that the best predictor of the beliefs previous chairmen held while in office are their prior writings, speeches, and confirmation hearings. Therefore, in choosing future chairs, it is crucial to evaluate the intellectual frameworks of potential nominees, and to reject candidates whose views are worrisome.

Abstract:
Conventional measures of monetary policy, such as the federal funds rate, are surely influenced by forces other than monetary policy. More importantly, central banks adjust policy in response to a wide range of information about future economic developments. As a result, estimates of the effects of monetary policy derived using conventional measures will tend to be biased. To address this problem, we develop a new measure of monetary policy shocks in the United States for the period 1969 to 1996 that is relatively free of endogenous and anticipatory movements. The derivation of the new measure has two key elements. First, to address the problem of forward-looking behavior, we control for the Federal Reserve's forecasts of output and inflation prepared for scheduled FOMC meetings. We remove from our measure policy actions that are a systematic response to the Federal Reserve's anticipations of future developments. Second, to address the problem of endogeneity and to ensure that the forecasts capture the main information the Federal Reserve had at the times decisions were made, we consider only changes in the Federal Reserve's intentions for the federal funds rate around scheduled FOMC meetings. This series on intended changes is derived using information on the expected funds rate from the records of the Open Market Manager and information on intentions from the narrative records of FOMC meetings. The series covers the entire period for which forecasts are available, including times when the Federal Reserve was not exclusively targeting the funds rate. Estimates of the effects of monetary policy obtained using the new measure indicate that policy has large, relatively rapid, and statistically significant effects on both output and inflation. We find that the effects using the new measure are substantially stronger and quicker than those using prior measures. This suggests that previous measures of policy shocks are significantly contaminated by forward-looking Federal Reserve behavior and endogeneity.

Abstract:
Many authors argue that asymmetric information between the Federal Reserve and the public is important to the conduct and the effects of monetary policy. This paper tests for the existence of such asymmetric information by examining Federal Reserve and commercial inflation forecasts. We demonstrate that the Federal Reserve has considerable information about inflation beyond what is known to commercial forecasters. We also provide evidence that monetary policy actions provide signals of the Federal Reserve's private information and that commercial forecasters modify their forecasts in response to those signals. These findings may explain why long-term interest rates typically rise in response to shifts to tighter monetary policy.

Abstract:
This paper investigates monetary policy's influence on poverty and inequality in both the short run and the long run. We find that the short-run and long-run relationships go in opposite directions. The time-series evidence from the United States shows that a cyclical boom created by expansionary monetary policy is associated with improved conditions for the poor in the short run. The cross-section evidence from a large sample of countries, however, shows that low inflation and stable aggregate demand growth are associated with improved well-being of the poor in the long run. Both the short-run and long-run relationships are quantitatively large, statistically significant, and robust. But because the cyclical effects of monetary policy are inherently temporary, we conclude that monetary policy that aims at low inflation and stable aggregate demand is the most likely to permanently improve conditions for the poor.

Abstract:
This paper evaluates the consistency of the NBER business cycle reference dates over time. Analysis of the NBER methods suggests that the early turning points are derived from detrended data, while the dates after 1927 are derived from data in levels. To evaluate the importance of this and other changes in technique, the paper derives a simple algorithm that matches the postwar NBER peaks and troughs closely. When this algorithm is applied to data for 1884-1940, the new dates systematically place peaks later and troughs earlier than do the NBER dates. Using the new business cycle chronology, recessions have not become shorter, less severe, or less persistent between the pre-World War I and the post-World War 11 eras. Expansions, however, have become longer.

Abstract:
No abstract is available for this paper.

Abstract:
This paper shows that the disproportionate impact of tight monetary policy on banks' ability to lend is largely the consequence of Federal Reserve actions aimed at reducing bank loans directly, rather than an inherent feature of the monetary transmission mechanism. We provide two types of evidence for this conclusion. First, a detailed examination of nine postwar episodes of contractionary monetary policy shows that while short-term interest rates always rose in response to tight policy, banks typically found ways of maintaining lending despite the falls in reserves. Banks' ability to lend was particularly affected by tight policy only when the Federal Reserve undertook actions, such as special reserve requirements, moral suasion, or explicit credit controls, to restrain bank lending directly. Second, simple regressions show that Federal Reserve credit actions have large and significant effects on the composition of external finance between bank loans and commercial paper and on the spread between the prime bank loan rate and the commercial paper rate, and that a bank credit channel of monetary transmission is not needed to explain the movements in these variables in response to tight policy.

Abstract:
This paper shows that inflation has depended strongly on the growth rate of output for most of the twentieth century. Only in recent years has the deviation of output from trend become the predominant determinant of price behavior. The paper also shows that the growth rate effect works primarily through materials prices, and that the declining importance of materials can explain why the growth rate effect has weakened over time. Finally, the paper shows that the growth rate effect can explain why prices rose in the mid- and late- 1930s despite the fact that output was substantially below trend.

Abstract:
This paper shows that the existing estimates of prewar gross national product exaggerate the size of cyclical fluctuations. The source of the exaggeration is that the original Kuznets estimates are based on the assumption that GNP moves one-for-one with commodity output valued at producer prices. New estimates of GNP for 1869-1918 are derived using the estimated aggregate relationship between GNP and commodity output for the interwar and postwar eras. The new estimates of GNP indicate that the business cycle is only slightly more severe in the pre-World War I era than in the post-World War II era.

Abstract:
No abstract is available for this paper.

Abstract:
This paper demonstrates that failures in monetary policy arise not just from dynamic inconsistency, but more importantly, from imperfect understanding of the economy and the effects of policy. Using recent and historic episodes from the United States and abroad, we show that limited knowledge on the part of economists, policymakers, elected leaders, and voters has been an important source of monetary policy mistakes. We then analyze what institutions of monetary policy could address the problems of both dynamic inconsistency and limited knowledge. Our analysis suggests that one set of institutions that could do this is a highly independent central bank with discretion about both the goals and the conduct of policy, combined with a two-level structure where elected leaders appoint a board of trustees for the central bank, which in turn selects the actual policymakers. We conclude by discussing recent and proposed reforms in monetary policy and institutions in industrialized countries in light of this analysis.

Abstract:
This paper demonstrates that failures in monetary policy arise not just from dynamic inconsistency, but more importantly, from imperfect understanding of the economy and the effects of policy. Using recent and historic episodes from the United States and abroad, we show that limited knowledge on the part of economists, policymakers, elected leaders, and voters has been an important source of monetary policy mistakes. We then analyze what institutions of monetary policy could address the problems of both dynamic inconsistency and limited knowledge. Our analysis suggests that one set of institutions that could do this is a highly independent central bank with discretion about both the goals and the conduct of policy, combined with a two-level structure where elected leaders appoint a board of trustees for the central bank, which in turn selects the actual policymakers. We conclude by discussing recent and proposed reforms in monetary policy and institutions in industrialized countries in light of this analysis.

Abstract:
This paper examines changes over time in the importance of the lending channel in the transmission of monetary shocks to the real economy. We first use a simple extension of the Bernanke-Blinder model to isolate the observable factors that affect the strength of the lending channel. We then show that based on changes in the structure of banks assets, reserve requirements, and the composition of external firm finance, the lending channel should have been stronger before 1929 than during the post-World War II period, especially the first half of this period. Finally, we demonstrate that conventional indicators of the importance of the lending channel, such as the spread between the loan rate and the bond rate and the correlation between loans and output, do not show the predicted decline in the importance of lending over time. From this we conclude that either the traditional indicators are not useful measures of the strength of the lending channel or that the lending channel has not bee quantitatively important in any era.

Abstract:
This paper uses simple time series techniques to analyze changes in the short-run behavior of 38 physical production series for 1889-1984. The main finding is that fluctuations in these output series in the periods 1889-1914 and 1947-1984 are very similar, while those in the period 1922- 1939 are anomalous. Relative to the prewar era, the postwar era exhibits only a slight damping of fluctuations and no increase in the persistence of short-run movements. At the same time, the correlation between the growth rates of the 38 goods is very low in both the prewar and postwar eras and has declined slightly over time.

Abstract:
Should monetary policymakers take the staff forecast of the effects of policy actions as given, or should they attempt to include additional information? This paper seeks to shed light on this question by testing the usefulness of the FOMC's own forecasts. Twice a year, the FOMC makes forecasts of major macroeconomic variables. FOMC members have access to the staff forecasts when they prepare their forecasts. We find that the optimal combination of the FOMC and staff forecasts in predicting inflation and unemployment puts a weight of essentially zero on the FOMC forecast and essentially one on the staff forecast: the FOMC appears to have no value added in forecasting. The results for predicting real growth are less clear-cut. We also find statistical and narrative evidence that differences between the FOMC and staff forecasts help predict monetary policy shocks, suggesting that policymakers act in part on the basis of their apparently misguided information.