American Economic Review
ISSN 0002-8282 (Print) | ISSN 1944-7981 (Online)
The Missing Transmission Mechanism in the Monetary Explanation of the Great Depression
American Economic Review
vol. 103,
no. 3, May 2013
(pp. 66–72)
Abstract
This paper examines the missing transmission mechanism in Friedman's and Schwartz's monetary explanation of the Great Depression. We review the challenge provided by the decline in nominal interest rates in the early 1930s, and show that the monetary explanation requires not just that there were expectations of deflation, but that they were caused by monetary contraction. Using a detailed analysis of Business Week magazine, we find evidence that monetary contraction and Federal Reserve policy contributed to expectations of deflation during the downturn. This suggests that monetary shocks may have depressed spending and output in part by raising real interest rates.Citation
Romer, Christina D., and David H. Romer. 2013. "The Missing Transmission Mechanism in the Monetary Explanation of the Great Depression." American Economic Review, 103 (3): 66–72. DOI: 10.1257/aer.103.3.66Additional Materials
JEL Classification
- B31 History of Economic Thought: Individuals
- E32 Business Fluctuations; Cycles
- E43 Interest Rates: Determination, Term Structure, and Effects
- E44 Financial Markets and the Macroeconomy
- E58 Central Banks and Their Policies
- G21 Banks; Depository Institutions; Micro Finance Institutions; Mortgages
- N12 Economic History: Macroeconomics and Monetary Economics; Industrial Structure; Growth; Fluctuations: U.S.; Canada: 1913-