Regional Monetary Policies and the Great Depression
The Great Depression provides a unique setting to test the impact of monetary policies on economic activity in a monetary union within the same country during a severe crisis. Until the mid-1930s, the 12 Federal Reserve banks had the ability to set their own discount rates and conduct independent monetary policy. Using a structural VAR with sign restrictions and new monthly data for each Federal Reserve district between 1923-33, we extract a national monetary policy factor from the 12 discount rates of the Federal Reserve banks. We then identify the region-specific component for each Fed district by subtracting the common factor component of monetary policy from the discount rate of each Federal Reserve bank. Our findings suggest that there was significant variation in regional monetary policy and that the district reserve banks played a key role in the economic contraction.
Marc Weidenmier acknowledges financial support from Chapman University. We are grateful to Mark Carlson, James Hamilton, William Lastrapes, Ralf Meisenzahl, Eugenio Rojas, Angela Vossmeyer, David Wheelock, and seminar participants at the Midwest Macroeconomics Meeting for helpful suggestions. We thank Asaf Bernstein for kindly sharing price data. Remaining errors are ours. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.