Could A Monetary Base Rule Have Prevented the Great Depression?

Bennett T. McCallum

NBER Working Paper No. 3162 (Also Reprint No. r1595)
Issued in November 1989
NBER Program(s):   EFG   ME

This paper continues an ongoing investigation of the properties of a specific, quantitative, and operational rule for the conduct of monetary policy, a rule that specifies settings of the monetary base that are designed to keep nominal GNP growing smoothly at a noninflationary rate. Whereas previous studies have examined the rule's performance in the context of United States experience since World War II, the present paper is concerned with the period 1923-1941. Counterfactual historical simulations are conducted with the rule and a small model of nominal GNP determination, estimated with U.S. quarterly data for 1922-1941. Residuals from the estimated relationships serve as estimates of the behavioral shocks that occurred and accordingly are fed into the simulation process quarter by quarter. The simulation results indicate that nominal GNP would have been kept reasonably close to a steady 3 percent growth path over 1923-1941 if the rule had been in effect, in which case it is highly unlikely that real output and employment could have collapsed as they did during the 1930s.

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Document Object Identifier (DOI): 10.3386/w3162


  • Journal of Monetary of Economics, Vol. 26, No. 1, pp. 3-26, (1990). ,
  • McCallum, Bennett T., 1990. "Could a monetary base rule have prevented the great depression?," Journal of Monetary Economics, Elsevier, vol. 26(1), pages 3-26, August.

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