War, Money, & Economy: Economic Performance in the Fed and Pre-Fed Periods

Abstract

How has the impact of wars affected our historical understanding of U.S. economic performance? While most economists believe the Federal Reserve has improved performance, the existing literature fails to account for exogenous shocks such as periods of war. This paper compares U.S. economic performance under the Fed to that in the pre-Fed period adjusting for wartime shocks. Following the existing literature, we divide the pre-Fed periods into subperiods according to major changes in the U.S. monetary system and the Fed period into subperiods according to economists’ common perceptions of Fed performance. We find that economic performance in the pre-Fed periods is mostly the same as or better than in the post-War II Fed period in terms of the rate of inflation, GDP growth, and GDP volatility.

Keywords: Federal Reserve, Inflation, GDP growth, Stability, Volatility

JEL Classification: E02, E31, E32, E42, N10