The Great Depression and the Friedman-Schwartz Hypothesis

By Lawrence J. Christiano, Roberto Motto, M. Rostagno. Social Science Research Network, 2003

449 citations recorded by the source corpus.

We evaluate the Friedman-Schwartz hypothesis that a more accommodative monetary policy could have greatly reduced the severity of the Great Depression. To do this, we first estimate a dynamic, general equilibrium model using data from the 1920s and 1930s. Although the model includes eight shocks, the story it tells about the Great Depression turns out to be a simple and familiar one. The contraction phase was primarily a consequence of a shock that induced a shift away from privately intermediated liabilities, such as demand deposits and liabilities that resemble equity, and towards currency. The slowness of the recovery from the Depression was due to a shock that increased the market power of workers. We identify a monetary base rule which responds only to the money demand shocks in the model. We solve the model with this counterfactual monetary policy rule. We then simulate the dynamic response of this model to all the estimated shocks. Based on the model analysis, we conclude that if the counterfactual policy rule had been in place in the 1930s, the Great Depression would have been milder.

Subfields: Economics and Econometrics

View Paper: https://www.semanticscholar.org/paper/82000332900462bc9bfe725a56d4d481bc0d98f5

How researchers see this paper

The researchers whose trusted networks rank it highest, strongest advocate first. Every researcher gets a different order.

In Economics and Econometrics

Citations in the corpus

DSGE Models for Monetary Policy Analysis (2010, unknown): “65 For a small sampling, see, for example, Bernanke, Gertler, and Gilchrist (1999); Christiano, Motto, and Rostagno (2003, 2009); Cúrdia and Woodford (2009); and Gertler and Kiyotaki (2010).”
The External Finance Premium and the Macroeconomy: Us Post-Wwii Evidence (2008, unknown): “As in Christiano et al. (2003), capital goods producers work in a perfectly competitive environment and face costs to changing the ow of investment.”
An Estimated Small Open Economy Model of the Financial Accelerator (2005, background): “In the log-linearized version of the model, ηt is perturbed from its mean by an AR(1) disturbance, which—as in Christiano, Motto, and Rostagno (2003) —could be interpreted as a shock to the rate of destruction of entrepreneurial financial wealth mimicking the bursting of a stock market bubble.”
Macroprudential Rules and Monetary Policy when Financial Frictions Matter (2015, unknown): “S. ﬁ nancial markets that led to the GFC. 7 Other studies have also made this assumption, such as Christiano et al. (2003), entrepreneur's balancesheet position), and thus can be characterized at the aggregate level by the following reduced-form equation: where s ′ (·) N 0, s (1)=1and f t…”
A new comparative approach to macroeconomic modeling and policy analysis (2012, unknown): “3 NK_CGG99 Clarida et al. (1999) 1.4 NK_CGG02 Clarida et al. (2002) 1.5 NK_MCN99cr McCallum and Nelson (1999), (Calvo-Rotemberg model) 1.”
Asset Price Misalignments and the Role of Money and Credit (2010, background): “Adalid and Detken (2007) focus – along the lines of Detken and Smets (2004) – on asset price booms. The latter are identified as being the consecutive periods with a minimum of 4 quarters in which the real aggregate price index exceeds its trend by at least 10%. The authors divide their booms period”
Shocks, Structures or Monetary Policies? The Euro Area and US After 2001 (2008, unknown): “The constraints are (7), (8), (9), (10), (11), (12) and (13).”
The Magnitude and Cyclical Behavior of Financial Market Frictions (2004, background): “6The role of financial factors in the Great Depression was originally emphasized by Fisher (1933) and has recently been considered by Bernanke (2000) and Christiano, Motto, and Rostagno (2004).”
Dynamic Prediction Pools: An Investigation of Financial Frictions and Forecasting Performance (2016, unknown): “The SW model is based on earlier work by Christiano et al. (2005) and Smets and Wouters (2003). It is a medium-scale DSGE model, which augments the standard neoclassical stochastic growth model with nominal price and wage rigidities as well as habit formation in consumption and investment adjustment”
Has the Fed Been a Failure (2012, unknown): “…that overly restrictive Fed policies were responsible for the ‘‘Great Contraction’’ of the early 1930s is now widely accepted (e.g. Bernanke, 2002b; Christiano et al., 2003), as is their claim that the Fed interfered with recovery by doubling minimum bank reserve requirements between August…”