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http://ssrn.com/abstract=526989
 
 

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The Great Depression and the Friedman-Schwartz Hypothesis


Lawrence J. Christiano


Northwestern University; Federal Reserve Bank of Cleveland; Federal Reserve Bank of Chicago; Federal Reserve Bank of Minneapolis; National Bureau of Economic Research (NBER)

Roberto Motto


European Central Bank (ECB)

Massimo Rostagno


European Central Bank (ECB)

March 2004

ECB Working Paper No. 326

Abstract:     
We evaluate the Friedman-Schwartz hypothesis that a more accommodative monetary policy could have greatly reduced the severity of the Great Depression. To do this, we first estimate a dynamic, general equilibrium model using data from the 1920s and 1930s. Although the model includes eight shocks, the story it tells about the Great Depression turns out to be a simple and familiar one. The contraction phase was primarily a consequence of a shock that induced a shift away from privately intermediated liabilities, such as demand deposits and liabilities that resemble equity, and towards currency. The slowness of the recovery from the Depression was due to a shock that increased the market power of workers. We identify a monetary base rule which responds only to the money demand shocks in the model. We solve the model with this counterfactual monetary policy rule. We then simulate the dynamic response of this model to all the estimated shocks. Based on the model analysis, we conclude that if the counterfactual policy rule had been in place in the 1930s, the Great Depression would have been relatively mild.

Number of Pages in PDF File: 106

Keywords: general equilibrium, lower bound, deflation, shocks

JEL Classification: E31, E40, E51, E52, E58, N12

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Date posted: July 29, 2004  

Suggested Citation

Christiano, Lawrence J. and Motto, Roberto and Rostagno, Massimo, The Great Depression and the Friedman-Schwartz Hypothesis (March 2004). ECB Working Paper No. 326. Available at SSRN: http://ssrn.com/abstract=526989

Contact Information

Lawrence J. Christiano (Contact Author)
Northwestern University ( email )
2003 Sheridan Road
Evanston, IL 60208
United States
847-491-8231 (Phone)
847-491-7001 (Fax)
Federal Reserve Bank of Cleveland
East 6th & Superior
Cleveland, OH 44101-1387
United States
Federal Reserve Bank of Chicago
230 South LaSalle Street
Chicago, IL 60604
United States
Federal Reserve Bank of Minneapolis
90 Hennepin Avenue
Minneapolis, MN 55480
United States
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
Roberto Motto
European Central Bank (ECB) ( email )
Kaiserstrasse 29
Postfach 16 03 19
D-60311 Frankfurt am Main
Germany
Massimo Rostagno
European Central Bank (ECB) ( email )
Kaiserstrasse 29
Postfach 16 03 19
D-60311 Frankfurt am Main
Germany
+49 69 1344 7663 (Phone)
+49 69 1344 7604 (Fax)
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