NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

The Missing Transmission Mechanism in the Monetary Explanation of the Great Depression

Christina D. Romer, David H. Romer

NBER Working Paper No. 18746
Issued in January 2013
NBER Program(s):   DAE   EFG   ME

This paper examines an important gap in the monetary explanation of the Great Depression: the lack of a well-articulated and documented transmission mechanism of monetary shocks to the real economy. It begins by reviewing the challenge to Friedman and Schwartz’s monetary explanation provided by the decline in nominal interest rates in the early 1930s. We show that the monetary explanation requires not just that there were expectations of deflation, but that those expectations were the result of 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 central years of the downturn. This suggests that monetary shocks may have depressed spending and output in part by raising real interest rates.

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Document Object Identifier (DOI): 10.3386/w18746

Published: Christina D. Romer & David H. Romer, 2013. "The Missing Transmission Mechanism in the Monetary Explanation of the Great Depression," American Economic Review, American Economic Association, vol. 103(3), pages 66-72, May. citation courtesy of

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