The Role of the Real Interest Rate in U.S. Macroeconomic History

48 Pages Posted: 19 Jan 2007 Last revised: 12 Mar 2008

See all articles by Ernst Juerg Weber

Ernst Juerg Weber

The University of Western Australia - UWA Business School

Date Written: March 2008

Abstract

A negative real interest rate has guaranteed macroeconomic equilibrium during every emergency in the United States since the early 19th century, except the Great Depression in the 1930s when deflation interfered with the interest rate mechanism. During the Great Depression, the interest rate mechanism failed because the zero-bound on the nominal interest rate implies that the real interest rate cannot be negative if there is deflation. This points to a monetary explanation of the Great Depression, and it suggests that central banks should suspend monetary policy rules that target inflation if there is an adverse political or economic shock that creates consumer pessimism.

Keywords: Consumption Euler equation, Negative real interest rate, Zero bound on nominal interest rate

JEL Classification: D91, E21, E52, G12, N21

Suggested Citation

Weber, Ernst Juerg, The Role of the Real Interest Rate in U.S. Macroeconomic History (March 2008). Available at SSRN: https://ssrn.com/abstract=958188 or http://dx.doi.org/10.2139/ssrn.958188

Ernst Juerg Weber (Contact Author)

The University of Western Australia - UWA Business School ( email )

Crawley, WA 6009
Australia

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