spurious volatility in historical unemployment data this paper shows that the stabilization of the unemployment rate between the pre 1930 and post 1948 eras is an artifact of improvements in data collection procedures prewar methods are used to construct postwar unemployment data that are consistent with the historical data the constructed postwar series is nearly as volatile as the pre 1930 unemployment data the constructed postwar data are systematically more volatile than the actual postwar data because the cyclical behavior of the labor force and productivity are misspecified in the construction procedures the relationship between the actual and constructed postwar unemployment series is used to construct new historical data

was debt deflation operative during the great depression i introduction important questions remain regarding the transmission mechanism that linked falling prices and falling output during the great depression despite recent analysis suggesting that the worldwide deflation was initiated and propagated internationally by negative impulses associated with the interwar gold standard 1 a key issue is whether the deflation during the early 1930s was unanticipated prior to the onset of the depression if it was at least largely unanticipated then when combined with rapidly rising nominal debt issuance bernanke s 1983 credit view explanation and extension of fisher s 1933 original debt deflation hypothesis helps explain the persistent monetary nonneutralities present during the depression these nonmonetary financial theories hold that events in the financial markets other than shocks to the money supply can account for the paths of output and prices without invoking irrational behavior on the part of agents in his debt deflation hypothesis fisher asserted that nominal overindebtedness and deflation are the dominant forces that account for great depressions specifically he argued that given nominally denominated debt contracts a protracted fall in prices and nominal incomes substantially increased real debt burdens led to debtor insolvency and lowered aggregate demand in a continuing spiral this fall in demand contributed to a further decline in the price level and thus further increases in the real burden of debt bernanke 1983 provided additional details to help explain fisher s debt deflation hypothesis he argued that in normal circumstances an initial decline in prices merely reallocates wealth from debtors to creditors such as banks usually such wealth redistribution has no first order impact on the economy however in the face of large shocks deflation in the prices of assets forfeited to banks by debtor bankruptcies leads to a decline in the nominal value of assets on bank balance sheets for a given value of bank liabilities also denominated in nominal terms this deterioration in bank assets threatens insolvency as banks reallocate assets away from loans to safer government securities some borrowers particularly small ones are unable to obtain funds often at any price furthermore if bank portfolio reallocation is long lived the shortage of credit for these borrowers helps explain the persistence of the downturn as the disappearance of bank financing forces lower expenditure plans aggregate demand declines which again contributes to the downward deflationary spiral 2 analyses such as cecchetti 1992 which carefully demonstrate that the deflation was anticipated at short horizons once it started do not bear directly on our discussion 3 instead to show that debt deflation was an important part of the contraction of the early 1930s it is important to document the accumulation of substantial medium and long term debt prior to 1929 in addition the finding that deflation could have been anticipated at horizons of 3 6 months does suggest that simple debt deflation theories for the propagation of the great depression must rely on the failure of agents to anticipate deflation several years in advance not several quarters in advance cecchetti 1992 note 26 we will argue that debt deflation was operative both because of a rise in nominally denominated debt and because the deflation in the early 1930s was unanticipated when this debt was being incurred we demonstrate three facts consistent with this statement of the debt deflation credit view explanation of the depression first we document that private medium and long term nominal debt during the 1920s exhibited a combination of a high initial value relative to income and a rapid growth rate that is unparalleled in a consistent data set covering more than half a century 4 second following the seminal work of evans and wachtel 1993 estimation results from a markov switching model of the price process during the entire interwar period suggest that the debt issued during the decade preceding the downturn occurred in a stable price regime and that the probability of remaining in this stable price regime was 0

equilibrium in the labor market with search frictions christopher a pissarides delivered his prize lecture on 8 december 2010 at aula magna stockholm university this abstract was borrowed from another version of this item

world war i and the postwar depression a reinterpretation based on alternative estimates of gnp abstract this paper examines the official commerce department estimates of gross national product for 1909 1928 and suggests that they are far inferior to the less commonly used kendrick gnp estimates the paper then derives a revised version of the kendrick series that alters significantly the representation of annual movements in gnp before 1919 this endorsement of a revised kendrick gnp series in place of the official commerce department estimates before 1929 suggests that aggregate demand movements had much less effect on real output during world war i and the depression of 1921 than is commonly believed

the determinants of equilibrium unemployment in britain a lot of energy is currently being expended in trying to understand what has been happening to unemployment in britain and the rest of the developed world in this paper we look at this question in the british context by trying to confront some possible explanations with the data since the data we use are quarterly over rather a short period we are setting the explanations a very hard test most explanations tend to be rather casual and the theories underpinning them ill developed thus for example the so called real wage argument is based on the idea that real wages affect labour demand and that the equilibrium real wage bears some relatively stable relationship to output per head but how stable is not clear thus whether or not we can expect a well defined stable ceteris paribus dynamic relationship between real product wages as a proportion of output per head and unemployment is equally unclear so if such a relationship does not show up in a quarterly regression model this may not be that serious for the theory nevertheless we must look for the relationship for how else are we ever to discriminate between a plethora of conflicting views the primary emphasis in this paper is on the secular factors affecting unemployment rather than the cyclical variables consequently we shall not be concerned with developing a coherent theory of cyclical fluctuations and in the empirical work we shall control for the cycle simply by making use of those exogenous or predetermined variables which other work in this field suggests are important 2 the remainder of the paper is set out as follows the next section is concerned with specifying a model which generates a definition of equilibrium unemployment the outline of this model is a pair of equations determining the flows into and out of unemployment and these are specified in section ii which looks closely at the possible variables involved section iii then deals with the results and presents some general conclusions

wage changes and intrafirm job mobility over the business cycle two case studies despite the many reasons to expect sluggish wage adjustment recent evidence suggests that real wages are quite procyclical growing more rapidly during economic expansions than during recessions and that this wage procyclicality pertains even to workers who stay with the same employer one possible explanation for these findings is the old hypothesis that a portion of firms cyclical adjustment of labor costs is achieved not by changing the wages paid in particular jobs but by changing the quality of labor assigned to those jobs the authors analysis of interwar personnel data from the ford motor company and the a m byers company supports that hypothesis the authors recognize that case studies of only two firms cannot be definitive but they conclude that cyclicality in workers job assignments deserves further attention

global imbalances and financial fragility the united states is currently engulfed in the most severe financial crisis since the great depression the crisis was triggered by the crash in the real estate bubble and amplified by the extreme concentration of risk in a highly leveraged financial sector conventional wisdom is that both the bubble and the risk concentration were the result of mistakes in regulatory policy an expansionary monetary policy during the boom period of the bubble and failure to reign in the practices of unscrupulous lenders in this paper we argue that while correct in some dimensions this story misses two key structural factors behind the securitization process that supported the real estate boom and the corresponding lever age first over the last decade the us has experienced large and sustained capital inflows from foreigners seeking us assets to store value caballero emmanuel farhi and pierre olivier gourinchas 2008 second especially after the nasdaq tech bubble and bust excess world savings have looked predominantly for safe debt investments this should not be surprising because a large amount of the capital flow into the us has been from foreign central banks and governments that are not expert investors and are merely looking for a store of value krishnamurthy and annette vissing jorgenson 2008 in this paper we develop a stylized model that captures the essence of this environment the model accounts for three facts observed during the boom and bust phases of the current crisis first during a period of good shocks which we interpret as the period up to the end

historical monetary policy analysis and the taylor rule this study examines the usefulness of the taylor rule framework as an organizing device for describing the policy debate and evolution of monetary policy in the united states monetary policy during the 1920s and since the 1951 treasury federal reserve accord can be broadly interpreted in terms of this framework with rather surprising consistency in broad terms during these periods policy has been generally formulated in a forward looking manner with price stability and economic stability serving as implicit or explicit guides as early as the 1920s measures of real economic activity relative to normal or potential supply appear to have influenced policy analysis and deliberations confidence in such measures as guides for activist monetary policy proved counterproductive at times resulting in excessive activism such as during the great inflation and at the brink of the great depression policy during the past two decades is broadly consistent with natural growth targeting variants of the taylor rule that exhibit less activism

was the deflation during the great depression anticipated evidence from the commodity futures market futures prices were well above spot prices for most commodities during most of the great depression evidently the spectacular declines in agricultural prices caught many people by surprise based on the historical correlations between commodity prices and consumer prices commodity markets anticipated stable consumer prices during the first year of the great depression the dramatic drop in nominal treasury bill yields thus should be read as a drop in ex ante real rates later in the great depression markets anticipated deflation but not as severe as actually occurred copyright 1992 by american economic association

could a monetary base rule have prevented the great depression abstract this paper continues an ongoing investigation of the properties of a policy rule that specifies settings of the monetary base that are designed to keep nominal gnp growing smoothly at a noninflationary rate counterfactual historical simulations for 1923 1941 are conducted with the rule and a small model of nominal gnp determination estimated with u s quarterly data with residuals fed in as estimates of the behavioral shocks that occurred the simulation results indicate that nominal gnp would have been kept reasonably close to a steady three percent path over 1923 1941 if the rule had been in effect

economic policy and the great depression in a small open economy we use a standard new keynesian model of a small open economy extended to include a government sector to investigate the great depression in australia a calibrated model with a fixed exchange rate regime similar to the gold standard does well in replicating the dynamics of output during the interwar period we then ask to what extent shocks to the economy would have been moderated by adopting modern day policies we find that if policymakers had adopted a flexible exchange rate with a taylor rule policy that output fluctuations during the great depression would have been moderated by up to 25 changes in government fiscal policy would also have moderated output fluctuations but by a slightly smaller amount overall we find that improved policy could have reduced output fluctuations by almost 50

comment on endogenous objectives and the evaluation of targeting rules for monetary policy 1 four mccallum principles itis bothanprivilege andapleasureformetoparticipateinthisconferenceinhonorofbennettt mccallum henceforthbtm thus beforeproceedingtomakespeci c comments regarding carl walsh s elegant paper on endogenous objectivesand targeting rules i would like to begin by providing some context in light ofbtm snumerouscontributionstotheanalysisofmonetarypolicy forthispurpose itishelpfultohighlightfourbasicprinciplesofeffectivemonetarypolicythatbtmhas consistently emphasized over the past several decades given the logicalcoherencyandintuitiveappealofhisworkonthissubject itisonlynaturaltorefertothesefourpointsasthe mccallumprinciples the rstmccallumprincipleisthatmonetarypolicymatters thatis theconductof monetary policy can have important consequences for social welfare btmanalyzedthetheoreticalandempiricalunderpinningsofthisprincipleinaseriesof

monetary policy in open economies abstract the recent literature on monetary policy in open economies has produced a strong presumption in favor of activistic policy and flexible exchange rates we argue that this result may owe much to the combination of two commonly made assumptions that nominal goods prices are rigid and that the monetary authorities have a lot of information about the economy when the source of nominal rigidity is found in wages and monetary policy is conducted according to less information demanding rules such as a standard interest rate rule policies that stabilize the money supply or the nominal exchange rate may perform better

reviving the federal statistical system the view from academia there is a tendency to think of official government statistics as unambiguous measures of economic activity in truth however nearly all of the available series are based heavily on assumptions and are sensitive to the estimation techniques used furthermore many of these assumptions and estimation techniques have been refined and improved over time whether these underlying assumptions are reasonable and whether the refinement of assumptions over time has been useful depends crucially on the questions one is trying to answer for example an estimate of consumption derived from data on retail sales may be perfectly adequate for planning future production or setting government budgets but may be disastrous for testing a subtle economic theory similarly gathering more genuine consumption data might improve our current estimates of consumption but a series that reflects retail sales for one era and genuine consumption for another could wreak havoc when used in estimating a time series rela

exchange rate regimes and asset prices abstract we study the implications of alternative exchange rate regimes for asset prices in a portfolio balance model motivated by the recent us china experience we establish that asset price responses to various shocks differ across a flexible regime and a unilateral peg but the differences for most shocks tend to be rather small moreover while both monetary and public debt expansions have inflationary effects on equity prices the latter s impact is stronger under a flexible exchange rate regime these two findings suggest that a flexible usd rimni rate would not have limited the recent asset price inflation in the us

would you like to shrink the welfare state a survey of european citizens welfare state reform a survey of what europeans want the fundamental problems facing european welfare states high unemployment and unsustainable public pensions plans in particular have been in the political debate for years so why have we seen so little reform to find out we surveyed the opinions of citizens in france germany italy and spain on their welfare states and on various reform options this is what we found first most workers underestimate the costs of public pensions though they are aware of their unsustainability second the status quo is a majoritarian outcome a majority of citizens opposes cuts to social security and welfare spending but also opposes further increases since population ageing without reform implies an automatic expansion our results suggest that most citizens would favour reforms that stabilize but do not shrink the current welfare states third many would welcome changes in the allocation of benefits a large number of workers in italy and germany would be willing to opt out of public pensions and replace them with private pensions though the details of how this scheme is formulated matter for its popularity and many italians and spaniards would welcome an extension of the coverage of unemployment insurance fourth conflicts over the welfare state are mainly shaped by the economic situation of the respondent while political ideology plays a limited role disagreements are found along three dimensions young versus old rich versus poor and outsider versus insider in terms of labour market status from a practical point of view this suggests that there is scope to bundle reforms strategically in order to build a large and mixed coalition of supporters tito boeri axel borsch supan and guido tabellini

could stable money have averted the great contraction i introduction although over fifty years have elapsed since the onset of the great contraction controversy still swirls about the factors responsible for its depth and long duration a basic issue is the hypothesis due to friedman and schwartz 1963 that the great contraction would have been attenuated had the federal reserve not allowed the money stock to decline although the validity of the hypothesis has been a subject of much debate there is little empirical evidence directly addressing it a direct test of the friedman and schwartz hypothesis requires simulating the behavior of output under a counterfactual policy of stable money that approach was adopted by warburton 1966 friedman 1960 and modigliani 1969 none of whom constructed a model of the economy on the basis of which to conduct his test recently mccallum 1990 has used simulations from a macro model to show that his base rule with feedback would have avoided the severe decline in nominal income that occurred between 1929 and 1933 1 the extent to which his rule would have improved the behavior of nominal income depends on the value of the feedback coefficient mccallum s simulations however do not address the issue considered here of how a stable money rule would have performed in this paper we present simulations that focus on the stable money counterfactual our model is based on mccallum s but we use a more general framework than his that a estimates separate relations for output and the price level and b places no prior restrictions on the feedback from output and the price level to money our stable money counterfactual does not change the long term rate of money growth from that actually experienced and thus involves only short run changes in the behavior of the money supply we assume that dynamics embedded in the output and price relation are not especially sensitive to this type of policy change we simulate two variants of milton friedman s 1960 constant money growth rule the first a strong form of the rule assumes that the fed could quickly offset changes in the money multiplier by changes in high powered money and thus keep the money stock on the constant growth rate path in each quarter the second a weaker form of the rule assumes that the money multiplier is observed with a one quarter lag and the fed can only set the expected rate of growth of money conditional on last period information equal to the constant rate our basic simulation is derived from a model estimated for the 1921 1 1941 4 interwar period the results of this simulation buttress the views of friedman and schwartz had a constant money growth rule with an annual rate equal to the average 1921 41 rate of 2 95 percent been followed throughout the interwar period the great contraction would have been avoided real output would have declined from 1929 3 to 1933 1 but the order of magnitude of the cumulative change 11 1 to 21 6 percent and the annual rate of change 3 3 to 6 6 percent when the actual cumulative change was 36 2 percent and the annual rate of change was 12 1 percent would have been comparable to other recessions in the nineteenth and twentieth centuries in the basic simulation we assume that the output and price relations remained stable over the entire interwar period the extraordinary economic conditions of the great contraction could have arguably shifted the output and price relations thus we also present an alternative simulation that uses estimates of these relations based on the 1920s data this simulation shows that a constant money growth rule with an annual rate equal to the 1921 29 average of 3 29 percent would have prevented even a mild recession during the great contraction period section ii contains a brief survey of the continuing debate over the cause and propagation mechanism of the great contraction and its implications for the stable money hypothesis

great expectations and the end of the depression what ended the great depression in the united states this paper suggests that the recovery was driven by a shift in expectations this shift was triggered by president franklin delano roosevelt s fdr policy actions on the monetary policy side roosevelt abolished the gold standard and announced an explicit policy objective of inflating the price level to pre depression levels on the fiscal policy side roosevelt expanded real and deficit spending which helped make his policy objective credible the key to the recovery was the successful management of expecta tions about future policy roosevelt s rise to power is modeled as a policy regime change as in thomas sargent 1983 and peter temin and barry wigmore 1990 this paper formalizes temin and wigmore s argu ment in a repeated game setting using a dynamic stochastic general equilibrium dsge model and argues that the regime change can account for the recovery in the model a regime change means the elimination of certain policy dogmas that constrain the actions of the government the regime change generates an endogenous shift in expectations due to a coordination of mon etary and fiscal policy this coordination ended the great depression by engineering a shift in expectations from contractionary i e the private sector expected future economic contrac tion and deflation to expansionary i e the public expected future economic expansion and inflation the expectation of higher future inflation lowered real interest rates thus stimulating demand while the expectation of higher future income stimulated demand by raising permanent income

country portfolio dynamics this paper presents a general approximation method for characterizing timevarying equilibrium portfolios in a two country dynamic general equilibrium model the method can be easily adapted to most dynamic general equilibrium models it applies to environments in which markets are complete or incomplete and it can be used for models of any dimension moreover the approximation provides simple easily interpretable closed form solutions for the dynamics of equilibrium portfolios

a banking explanation of the us velocity of money 1919 2004 the paper shows that us gdp velocity of m1 money has exhibited long cycles around a 1 25 per year upward trend during the 1919 2004 period it explains the velocity cycles through shocks constructed from a dsge model and annual time series data ingram et al 1994 model velocity is stable along the balanced growth path which features endogenous growth and decentralized banking hat produces exchange credit positive shocks to credit productivity and money supply increase velocity as money demand falls while positive goods productivity shock raises temporary output and velocity the paper explains such velocity volatility at both business cycle and long run frequencies with filtered velocity turning negative starting during the 1930s and the 1987 crashes and again around 2003 results suggest that the money and credit shocks appear to be more important for velocity during less stable times and the goods productivity shock more important during stable times

the role of shocks and institutions in the rise of european unemployment the aggregate evidence two key facts about european unemployment must be explained the rise in unemployment since the 1960s and the heterogeneity of individual country experiences while adverse shocks can potentially explain much of the rise in unemployment there is insufficient heterogeneity in these shocks to explain cross country differences alternatively while explanations focusing on labour market institutions explain current heterogeneity well many of these institutions pre date the rise in unemployment based on a panel of institutions and shocks for 20 oecd nations since 1960 we find that the interaction between shocks and institutions is crucial to explaining both stylised facts

historical decomposition of aggregate demand and supply shocks in a small macro model we estimate and analyze the impact of multiple aggregate demand and aggregate supply shocks in a small macroeconomic model of the economy the analysis serves two purposes first we assess the relative importance of the various shocks in explaining the path of output over the past three decades second we conduct counterfactual policy experiments which show the effects of alternative policies on key macro variables we find that using the monetary policy tool reserves or the base such that constant money growth occurs would have produced superior economic results fluctuations in macroeconomic activity are generally explained in terms of shocks to aggregate demand and supply many theoretical models suggest a role for both types of shocks demand shocks including but not limited to policy innovations are typically thought to have real effects in the short to medium run but not in the long run supply shocks including resource and technology shocks have effects in both the short and long runs most empirical studies find important effects of both aggregate demand and supply shocks although demand and supply shocks are important conceptually in applied work the nature of the identified shocks has differed some studies identify only one generic shock to aggregate

the 1920 21 deflation the role of aggregate supply i introduction the 1920 21 recession in the united states was brief relative to the great depression of a decade later but it included a remarkably sharp price deflation the decline in the gnp price deflator from 1920 to 1921 is the largest one year percentage decline in the series in the more than 120 years covered this is true whether the department of commerce 1986 estimates or the recently provided balke and gordon 1989 or romer 1989 estimates are used these estimates produce one year deflation figures of 18 percent 13 0 percent and 14 8 percent respectively the closest competitor is the 11 5 percent deflation recorded for 1931 32 the third year of the great depression 1 annual data for wholesale prices tell a similar story wholesale prices declined by 36 8 percent for 1920 21 the largest one year decline on record going back at least to the american revolutionary war period the 1920 21 deflation contains another striking feature not only was it sharp it was large relative to the accompanying decline in real product the ratio of the percentage decline in the gnp deflator for 1920 21 to the percentage decline in real gnp is 2 6 using the department of commerce figures 3 7 using the balke and gordon data and 6 3 using the romer data by contrast during 1929 30 the first year of the great depression the gnp deflator declined by 2 7 percent and real gnp by 9 4 percent for a ratio of 0 3 the ratios of the percentage decline in gnp prices to the percentage decline in real gnp for 1930 31 1931 32 1932 33 and 1937 38 the other great depression years in which real gnp declined were 1 0 0 9 1 2 and 0 3 respectively all well below the 1920 21 figures this paper examines the 1920 21 deflation it asks why the deflation was so sharp both in itself and in relation to the decline in real product the answer the paper concludes is that the deflation was produced by a sharp decline in aggregate demand combined with an increase in aggregate supply a supply increase in which deflationary expectations played a prominent role ii the 1920 1921 recession the national bureau of economic research dates the 1920 21 recession from a general business peak in january 1920 to a trough in july 1921 it was mild at first wholesale prices continued to increase until may 1920 four months past the general business peak by july 1920 the federal reserve board s index of industrial production had declined by only 7 percent from its january peak and factory employment had fallen 7 3 percent the contraction then became severe by the year s end industrial production had fallen 25 6 percent below its january 1920 peak and bottomed out at 32 6 percent below its january 1920 level in july 1921 the general business trough wholesale prices were 42 9 percent below their may 1920 peak by july 1921 industrial production had fallen by 32 6 percent in eighteen months wholesale prices by 42 9 percent in fourteen months the deflation eliminated more than 70 percent of the rise in wholesale prices associated with world war i civilian unemployment rose substantially during the recession according to lebergott 1964 512 the unemployment rate was 1 4 percent for both 1918 and 1919 5 2 percent for 1920 and 11 7 percent for 1921 the 1920 21 recession was not the first following the end of world war i the economy had slowed in 1918 at about the time of the november armistice as the transition was made from wartime to peacetime production both industrial production and wholesale prices declined moderately the national bureau of economic research dates this first post war recession as extending from august 1918 to march 1919 the economy then turned upward and expanded peaking in january 1920 in this period industrial production rose by 25 5 percent wholesale prices after hitting bottom in february 1919 had risen by 20

output inflation and stabilization a counterfactual analysis abstract we estimate a small open economy macro model in which movements in inflation and output are driven by fiscal real monetary exchange rate and asset disturbances we use 1980 s data from bolivia and brazil each of which undertook stabilization programs though only bolivia s succeeded an important part of our analysis is counterfactual where hypothetical paths of output and inflation under alternative policymaking scenarios are investigated for bolivia there is clear evidence that deficits affect inflation largely through their effects on money growth and do not have much influence on output external shocks are important for brazilian inflation

unemployment insurance and short time compensation the effects on layoffs hours per worker and wages we analyze two unemployment insurance systems in one unemployed workers receive benefits while those on reduced hours do not as in north america at least until recently in the other short time compensation is paid to workers on reduced hours as in europe the first system causes inefficient temporary layoffs for some parameters the latter does not but implies inefficient hours per worker some evidence is presented regarding these effects despite policymakers recent enthusiasm for short time compensation the clear implication of this project is that changes should come on the tax not benefit side of the system

anticipated money unanticipated money and output 1873 1930 anticipated money unanticipated money and output 1873 1930 i introduction this paper examines the roles of anticipated and unanticipated money in the period between the civil war and the depression 1 such an examination is warranted for at least two reasons first estimation of the impact of anticipated and unanticipated money on output for historical periods can enhance our understanding of the responses of economic activity to these key variables 2 second recent work has shown that traditional historical estimates of output may be faulty see romer 1986a 1986b 1986c 1988 not only do most studies investigating the economic roles played by anticipated and unanticipated money concentrate on the post world war ii era those that discuss the period before world war ii such as rush 1985 1986 use traditional data indeed despite the interesting analyses by rush if the validity of the conventional data on output and unemployment for the era under consideration is rejected then virtually no results on the importance of monetary and real factors for economic activity are available for this important period thus further discussion of this topic is needed to answer two important questions what do the revised data show us about the historical economy do these revisions change the inferences drawn about monetary influences on economic activity the analysis presented here is comprehensive in that a wide range of output measures are employed both in terms of the types of output and in terms of the manner in which the output measures are constructed given this variety in the output measures consistent results on the effects of anticipated and unanticipated money across output measures indicate that conclusions drawn from the analysis are robust in particular the empirical results presented below support the following hypotheses i that anticipated m2 and monetary base growth have no effect on output regardless of the output measure used ii that unanticipated m2 and monetary base growth do effect output regardless of the output measure used and iii that changes in financial intermediation may be important for the evolution of output over time support for hypotheses i and ii is consistent with the monetary explanation of business cycles support for hypotheses iii may be consistent with real explanations of business cycles if exogenous shocks to the monetary production technology subsequently affect output 3 taken together the joint support for hypotheses i iii suggests that at a minimum neither the real nor the monetary explanations for historical u s business cycles can be discounted without additional work the remainder of the paper is organized as follows section ii presents a brief overview of the historical period under consideration along with a discussion of prior work on the effects of anticipated and unanticipated money on output determination during this time period section iii discusses the data and the methodology the empirical results are presented in section iv and the conclusions in section v ii overview the historical period the period under investigation 1873 1930 is one of substantial economic change banking panics the return to the gold standard the founding of the federal reserve system and world war i are some of the more important events occuring during this period we consider the role played by expected and unexpected money in output determination for several major subperiods while data availability largely determined the selection of these subperiods they generally correspond to major economic events despite the structural and institutional changes over the period we also examine the roles of anticipated and unticipated money growth in the determination of output over the entire time period to be valid tests of the impact of money growth on output require a reasonable degree of homogeneity in the economic environment

the federal reserve amendments of 1917 the beginning of a seasonal note issue policy the federal reserve adopted a policy of smoothing the seasonal behavior of interest rates after the amendments of 1917 these amendments reduced the collateral requirements for notes issued and thereby increased note issue capability notes in circulation more than doubled from june to december 1917 these amendments were passed to assist with war related financing as their timing coincided with the entry of the united states into world war i the smoothing of interest rates seasonals between 1914 and 1917 was not due to the founding of the federal reserve system but rather to trade related gold flows copyright 1991 by ohio state university press

the role of unemployment insurance in an economy with liquidity constraints and moral hazard the potential welfare benefits of unemployment insurance along with the optimal replacement ratio are studied using a quantitative dynamic general equilibrium model to provide a role for unemployment insurance agents in our economy face exogenous idiosyncratic employment shocks and are unable to borrow or insure themselves through private markets in the absence of moral hazard replacement ratios as high as 65 are optimal and the welfare benefits of unemployment insurance are quite large however if there is moral hazard and the replacement ratio is not set optimally but is instead set to an empirically plausible value the economy can be much worse off than it would be without unemployment insurance

unemployment responses to skill biased technology shocks the role of labour market policy do skill biased shocks that increase the spread of labour productivities interacting with different policy regimes explain the rise in unemployment in europe relative to the united states in the 1980s and 1990s the hypothesis is an implication of a version of the mortensen and pissarides 1994 model of equilibrium unemployment which allows for worker heterogeneity a calibrated version of the model implies that a similar unemployment increase would have occurred in the united states over this period given changes in relative productivity by education implied by observed wage changes had unemployment compensation and employment protection policies been at european levels

hybrid inflation and price level targeting in this paper we investigate the properties of monetary regimes that combine price level and inflation targeting we look both at an optimal control and at a simple rule characterisation of these regimes we derive numerical results by modelling the economy as a small scale open economy re model calibrated on uk data we conclude that 1 the relative merits of price level and inflation targeting as well as of mixes of these two depend on particular modelling and policy assumptions and 2 these merits do not always change gradually and or monotonically as we move from one regime to another

a note on america s 1920 21 depression as an argument for austerity this note argues that recent interest in the 1920 21 depression in the usa as a historical precedent for austerity is inappropriate most of the austerity measures preceded the depression which had already begun receding by the time warren harding implemented the relatively modest spending and tax cuts that are cited by modern proponents of austerity the evidence suggests that the 1920 21 depression was the result of a variety of supply constraints rather than a deficiency of effective demand and is therefore a poor test of the efficacy of keynesian fiscal policy

a linearized version of lucas s neutrality model the model developed in robert lucas s influential expectations and the neutrality of money has not been widely used for extensions or modifications of the original analysis in part because of its difficulty of manipulation the present paper describes a linearized version that unlike other models prominent in the rational expectations literature retains the original s mainfeatures yet is comparatively easy to manipulate two examples of modifications facilitated by this linearization are included these involve an autoregressive money growth specification and the assumption of lump sum rather than proportional monetary transfers this abstract was borrowed from another version of this item

liquidity traps and large scale financial crises this paper estimates a nonlinear threshold var to investigate if a keynesian liquidity trap due to a speculative motive was in place in the u s great depression and the recent great recession we find clear evidence in favor of a breakdown of the liquidity effect after an unexpected increase in m2 in the 1921 1940 period this evidence which is consistent with the keynesian view on a liquidity trap is shown to be state contingent in particular it emerges only when a speculative regime identified by high realizations of the dow jones index is considered a standard linear framework is shown to be ill suited to test the hypothesis of a keynesian liquidity trap an investigation performed with the same data for the period 1991 2010 confirms the presence of a liquidity trap just in the speculative regime this last result emerges significantly only when we consider the federal funds rate as the policy instrument and we model the divisia m2 measure of liquidity

monetary policy games with broad money targets a linear quadratic control analysis of the u s and japan abstract this paper compares the different outcomes from noncooperative and cooperative equilibria when the federal reserve and the bank of japan follow monetary policies based on broad money supply targets the analysis is an application of stochastic linear quadratic control methods and combines vector autoregressive models with forward looking efficient market models for asset prices the results indicate that the use of broad money targets bring significant welfare gains to both countries in terms of reduced volatility of nominal income broad money exchange rates and asset prices however there appears to be little difference between cooperative and noncooperative monetary policy arrangements

job search and savings wealth effects and duration dependence this article studies a risk averse worker s optimal savings and job search behavior as she moves back and forth between employment and unemployment we show that job search effort is negatively related to wealth under the assumption of additively separable utility consequently job search exhibits positive unemployment duration dependence because wealth is drawn down to smooth consumption as the spell progresses finally given optimal search savings still provide imperfect insurance against income fluctuations precautionary savings are built up during employment spells and run down during unemployment spells but the consumption path will not be perfectly smooth over states

job security provisions and employment european countries have enacted various job security provisions over the last 30 years employers are required to pay workers on separation or to give advance notice of termination in anything less than a perfectly functioning market there are effects of the provisions on employment incumbents are more likely to retain their jobs but new workers are less likely to be hired an examination of the european data suggests that severance pay requirements reduce employment

an empirical analysis of oil price shocks in the interwar period i introduction post world war ii experience demonstrates that disturbances to aggregate supply are important determinants of aggregate economic performance a casual glance at the post 1970 data strongly suggests a correlation between shocks to the price of oil and recession hamilton 1983 formally demonstrates that this correlation arises from what appears to be a causal link that runs from oil price increases to reduced economic activity the sequence of oil price increases followed by recession characterizes every post world war ii economic downturn in the u s with the exception of 1960 61 other research confirms the critical role of supply shocks in explaining post world war ii macroeconomic performance burbidge and harrison 1984 employ vector autoregressions vars to examine the impact of oil price shocks over the 1962 82 period for several countries they conclude that these shocks played a large role in deepening the recessions of the 1970s with the impact on the 1973 74 recession much greater than that of 1979 80 tatom 1988 estimates the impact of the 1979 80 increase in the relative price of oil and reports that this shock reduced the amount of output that could be produced with available labor and capital by 5 7 percent thoma 1992 re examines the work of litterman and weiss 1985 and finds that the ex ante real interest rate is not exogenous to supply shocks contrary to what is reported in litterman and weiss using annual data over the 1948 82 period loungani 1986 shows that any correlation between an index of the dispersion of unemployment across industries and the aggregate unemployment rate is due to the dispersion index s collinearity with oil price shocks once this collinearity is accounted for the dispersion index has no explanatory power to account for movements in the aggregate unemployment rate while the evidence for the causal link between supply shocks and output appears most dramatic for the post 1970 data hamilton 1983 argues that the entire post war period be treated as a continuous whole the enduring regularity of the oil price shock recession relation in this period leads to a natural question is there any evidence that oil price shocks either positive or negative played any role in the cyclical fluctuations and secular expansion of the 1920s and the great depression figure 1 presents a plot of the relative price of oil defined precisely in section ii for the 1921 1 1938 6 period we observe a number of sharp movements in the relative price of oil that suggest an assessment of the empirical impact of oil price shocks during the interwar period is warranted accordingly we investigate the effects of oil price shocks during the interwar period within the context of a small macroeconomic model 1 the empirical framework is a var model that consists of output the price level the monetary base the m2 money multiplier the commercial paper rate government spending a financial intermediation variable and a measure of oil price shocks these are variables frequently found in small macroeconomic models monthly data for the period 1924 2 1938 6 are used to specify and estimate the model we evaluate the impact of oil price shocks on prices and output through computation of variance decompositions the standard errors reported are generated through monte carlo simulations historical decompositions for the 1929 9 1938 6 period are also computed so we can specifically examine the effects of oil price shocks over the sample period that includes the great depression we chose the var modeling approach because there is little agreement on the appropriate structural model and var estimation places few restrictions on the way in which the system s variables interact in the specification and estimation of the model all variables are treated as jointly determined no a priori assumptions are made about the exogeneity of any of the system s variables at this stage of analysis

recent developments in the theory of rules versus discretion policymaker this perspective on rules versus discretion was changed by kydland and prescott 1977 who looked at rules as a form of commitment a commitment amounts to a binding contract which specifies in advance the actions that someone will take possibly contingent on some exogenous variables that everyone can observe in contrast under discretion a person promises only to take those future actions that will best further his objectives later on such promises are easy to keep thus discretion is the special case of a rule or contract in which none of today s provisions restrict a person s future actions in the area of private business dealings it is natural to think about optimal forms of contracts which would not usually be pure discretion similarly for public policy the perspective becomes the optimal form of rules or prior restrictions even the smart benevolent policymaker is likely to desire and use

optimal unemployment insurance this paper considers the design of an optimal unemployment insurance system the problem is modeled as a repeated principalagent problem involving a risk averse agent the unemployed worker and a risk neutral principal which cannot monitor the agent s search effort the optimal long term contract subject to the associated incentive constraints is characterized this contract involves a replacement ratio that decreases throughout the unemployment spell and a wage tax after reemployment that under some mild regularity conditions increases with the lenght of the unemployment spell some numerical results are presented that suggest that the gains from switching to this optimal unemployment insurance scheme could be quite large the performance of this optimal contract is also compared to alternative liquidity provision mechanisms

the reconstruction finance corporation the gold standard and the banking panic of 1933 the banking crisis of 1933 which forced a national holiday closing the entire u s financial system is often blamed on either publication of the names of banks borrowing from the reconstruction finance corporation a speculative run on the gold backed dollar due to fears that president elect roosevelt would devalue the currency or both evidence presented here indicates that neither factor started the final banking crisis of the depression the michigan bank holiday ignited the panic resulting in a series of bank holidays and a run on the dollar this chain of events toppled the united states financial system

why do firms offer employment protection this paper derives optimal employment contracts when workers are risk averse and there are employment and unemployment risks without income insurance consumption rises during employment and falls during unemployment optimal employment contracts offer severance compensation and sometimes give notice before dismissal severance compensation smooths consumption during employment and dismissal delays insure partially against the unemployment risk because of moral hazard during the delay consumption falls to give incentives to the worker to search for another job no dismissal delays are optimal if exogenous unemployment compensation is sufficiently generous

the redistributive roles of unemployment insurance and the dynamics of voting abstract public unemployment insurance is analyzed as the majority voting equilibrium policy of a dynamic stochastic economy abstracting from incentive effects we focus on redistribution some results are because of the distribution of heterogeneous employment opportunities public insurance may be democratically chosen even if complete private markets exist and because of the dynamics even when agents are intrinsically homogeneous the equilibrium benefit level or duration benefit schedule deviates from what has been described as optimal in the literature the effects of differences in the average frequency or duration of unemployment on equilibrium taxes and benefits are investigated with some unanticipated results

the u s business cycle 1867 2006 a dynamic factor approach we estimate a stock watson index of economic activity to assess u s business cycle volatility since 1867 we replicate the great moderation of the 1980s and 1990s and find exceptionally low volatility also in the golden age of the 1960s postwar moderation relative to pre 1914 occurs under constant but not time varying factor loadings suggesting structural change toward more volatile sectors for comparable series the u s postwar business cycle was as volatile overall as under the classical gold standard but much less so during the great moderation and the golden age

the banking panics in the united states in the 1930s some lessons for today in this paper we discuss the lessons learned from the us banking panics in the 1930s for the response by the federal reserve to the crisis of 2008 we revisit the debate over illiquidity versus insolvency in the banking crises of the 1930s and provide empirical evidence that the banking crises largely reflected illiquidity shocks in the recent crisis the fed under bernanke had well learned the lesson from the banking panics of the 1930s of conducting expansionary monetary policy to meet demands for liquidity however unlike in the 1930s the deeper problem of the recent crisis was not illiquidity but insolvency and especially the fear of insolvency of counterparties a number of virtually insolvent us banks deemed too big and too interconnected to fail were rescued by fiscal bail outs

the role of national debts in the determination of the yen dollar exchange rate an intertemporal optimization model is developed to examine the determinants of the long run nominal yen dollar exchange rate in the presence of national debts the model is tested empirically using data from japan and the usa the proposed theoretical specification is well supported by the data and shows that relative national debts as well as monetary and financial factors may play a significant role in the determination of the long run nominal exchange rate between the yen and the dollar

efficient unemployment insurance this paper constructs a tractable general equilibrium model of search with risk aversion an increase in risk aversion reduces wages unemployment and investment unemployment insurance has the opposite effect insured workers seek high wage jobs with high unemployment risk an economy with risk neutral workers achieves maximal output without any unemployment insurance but an economy with risk averse workers requires a positive level of unemployment insurance to maximize output therefore moderate unemployment insurance not only improves risk sharing but also increases output

price inertia and policy ineffectiveness in the united states 1890 1980 this paper introduces a new approach to the empirical testing of the lucas sargent wallace lsw policy ineffectiveness proposition which compares the lsw hypothesis with an alternative that states that prices respond fully in the long run but only gradually in the short run to nominal aggregate demand disturbances the empirical equations estimated for a new set of quarterly data extending back to 1890 exhibit uniformly high responses of real output and low responses of price changes to anticipated changes in nominal gnp the paper compares and tests three alternative methods of introducing persistence effects into the lsw framework