Inflation Expectations and Recovery from the Depression in 1933: Evidence from the Narrative Record
Department of Economics, Occidental College
Board of Governors of the Federal Reserve System (FRB)
August 1, 2014
This paper uses the historical narrative record to identify whether inflation expectations shifted during the second quarter of 1933, precisely as the recovery from the Great Depression took hold. We examine a variety of evidence: historical news accounts, forecasts of contemporary business analysts, a newly constructed data series reporting the number of news articles containing the term inflation, and an event study analysis. We find that (1) inflation expectations changed dramatically during the second quarter of 1933; (2) Roosevelt’s communications strategy, primarily his public commitment to raise prices to pre-depression levels, along with key events such as the abandonment of the gold standard and the passage of the Thomas Inflation Amendment, caused the shift in inflation expectations, and (3) inflationary news shocks had a significant impact on financial and exchange-rate markets. In addition, we find support for the notion that the second quarter of 1933 represents an inflationary regime shift and estimate that the regime shift increased monthly output growth by 4 to 7 percentage points.
Number of Pages in PDF File: 70
Keywords: inflation expectations, Great Depression, narrative evidence, liquidity trap, regime change
JEL Classification: E31, E32, E42, N12
Date posted: September 13, 2013 ; Last revised: September 2, 2014
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