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

comment on cole the view that small rms face greater problems in obtaining credit thanlarge rms has a long history going back at least as far as the loan relationshipmodels of hodgeman 1961 and wood 1975 and the credit rationing work ofja ee and modigliani 1969 nevertheless there are few studies that provideor analyze direct evidence that credit is rationed with nonprice terms to rms at the macro level most empirical studies of business credit availability use in direct proxies ranging from early studies such as ja ee and modigliani 1969 who gauged availability by the share of small sized loans among all bank loans to more modern models that point to a role of cash ow as a determinant ofinvestment at the micro level empirical studies have indirectly tested forthe existence of credit rationing by assessing the behavior of loan pricing e g berger and udell 1992 1995 testing whether liquidity or cash owhas a greater impact on investment by smaller rms relative to larger rms e g fazzari et al 1988 or investigating whether smaller rms more heavilyuse expensive trade credit during periods of tight credit e g ja ee 1971 pe tersen and rajan 1994 cole 1998 lls a void in the literature on credit availability by testing how rm characteristics a ect a small rm s likelihood of experiencing a loan denialusing a unique cross section data set that provides direct evidence of nonpricecredit rationing this paper nds that preexisting nancial service relationshipswith a lender have a positive e ect on the probability of loan approvals con sistent with prior studies arguing that banks gain information about credit riskfrom monitoring borrower deposit activity e g black 1975 fama 1985 nakamura 1993 in addition results indicate that much of the e ect of

nonmonetary effects of financial crises abstract this paper empirically examines the nonmonetary effects of financial crises it exploits the special nature of the great depression in canada to test propositions linking financial structure and aggregate economic activity canada s large domestic debt and shrinking banking system had little impact on the course of the depression in comparison with results for the united states this implicates bank failures as a prime factor in the real effects of financial crises

nonmonetary effects of the financial crisis in propagation of the great depression this paper examines the effects of the financial crisis of the 1930s onthe path of aggregate output during that period our approach is complementary to that of friedman and schwartz who emphasized the monetary impact of the bank failures we focus on non monetary primarily credit related aspects of the financial sector output link and consider the problems of debtors as well as those of the banking system we argue that the financial disruptions of 1930 33 reduced the efficiency of the credit allocation process and that the resulting higher cost and reduced availability of credit acted to depress aggregate demand evidence suggests that effects of this type can help explain the unusual length and depth of the great depression this abstract was borrowed from another version of this item

pressure groups and public expenditures the flypaper effect reconsidered a model of government budgeting is developed in which lobbying by interest groups can divert the allocation of funds away from the one preferred by the median voter the model is applied to state and local governments to show that the flypaper effect the tendency for lump sum grants to increase public expenditures by more than an equivalent increase in the community s pretax income can be explained without the customary assumption of voter fiscal illusion furthermore the model predicts variation in the extent of the flypaper effect among expenditure categories as found in previous empirical studies

nonlinear liquidity growth dynamics with corridor stability abstract the paper presents a dynamic model of the financial real interaction in particular it shows that i liquidity when facilitated through credit can operate procyclically ii credit may add to the asymmetry of business cycles and iii endogenous propagation mechanisms in monetary economies are shock dependent using a variant of foley s growth cycle model we demonstrate that the portrayal of financial read forces exhibits corridor stability in this case small shocks have no lasting effects but large enough shocks can lead to persistent cycles or unstable non periodic fluctuations the hopf birfurcation theorem is rendered inapplicable due to the fact that the trajectories are stable in the vicinity of equilibrium a global characterization of the dynamics is required instead as credit by growing makes itself grow so when distrust has taken the place of confidence failure and panic breed panic and failure marshall 1879 99

were price changes during the great depression anticipated abstract this paper reassesses whether the large swings in prices during the 1930 s were anticipated we argue that uncertainty about monetary fiscal and exchange rate policies induced systematic differences between the rate of price change expected by economic agents at the time and the time series forecasts of inflation our analysis of nominal interest rates and ex post inflation strongly supports this view in fact our results suggest that the deflation of the early depression years and the inflation that followed were both largely unanticipated

tax base variability and procyclical fiscal policy in developing countries abstract based on a sample of 56 countries we show that fiscal policy in the g7 countries appears to be acyclical while fiscal policy in developing countries is procyclical i e fiscal policy is expansionary in good times and contractionary in bad times to explain this puzzle we develop an optimal fiscal policy model in which running budget surpluses is costly because they create pressures to increase public spending given this distortion a government that faces large fluctuations in the tax base as is the case for developing countries will find it optimal to run a procyclical fiscal policy

financial factors in the great depression eginning with irving fisher 1933 and john maynard keynes 1931 b 1963 macroeconomists have argued that financial markets were important sources and propagators of decline during the great depression turning points during the depression often coincided with or were preceded by dramatic events in financial markets stock market collapse waves of bankruptcy and bank failure and contractions in the money stock but the mechanism through which financial factors contributed to the depression has been a source of controversy as has been the relative importance of financial factors in explaining the origins and persistence of the depression this essay reviews the literature on the role of financial factors in the depression and draws some lessons that have more general relevance for the study of the depression and for macroeconomics i argue that much of the recent progress that has been made in understanding some of the most important and puzzling aspects of financial real links in the depression followed a paradigm shift in economics a central neglected theoretical piece of the story for financial factors was the allocative effects of imperfections in capital markets which can imply links between disruptions in financial markets and subsequent economic activity also the increasing emphasis on learning and path dependence in economics has helped to explain why financial shocks during the 1930s were so severe and why policy makers failed to prevent the depression

intergovernmental transfers and procyclical public spending this paper tests the predictions that i sub central government expenditures are procyclical and ii sub central government expenditures are likely to be more procyclical than central government spending the predictions are based on the importance of voracity effects and on the proposition that they are systematically more pervasive if spending is financed by intergovernmental transfers evidence from 23 oecd countries between 1995 and 2006 indicates that sub central government spending is more procyclical than central government expenditure

the flypaper effect what happens to a state s spending when it receives an unconditional grant from the federal government the standard theoretical analysis predicts that the increase in spending will be the same as that generated by an equivalent increase in local incomes or roughly 5 10 percent for most states in contrast numerous empirical analyses have found that spending increases by much more with some estimates near 100 percent this result is known as the flypaper effect since the money appears to stick where it hits the authors review this evidence as well as other studies that find similar behavior in firms

international debt and world business fluctuations abstract the international transmission of real productivity disturbances is examined in an optimizing model with two countries each inhabited by an infinitely lived representative consumer producer we analyze the dynamics of output consumption investment interest rates and net external debt foreign productivity shocks can have positive or negative impacts on domestic output and international debt depending on the intertemporal distribution of the shocks transient foreign shocks are shown to be positively transmitted and lead to increased domestic indebtedness while permanent foreign shocks are negatively transmitted and lead to a decline in domestic indebtedness

long run neutrality high inflation and bank insolvencies in argentina and brazil abstract using long low frequency data on money and output over 1884 1996 for argentina and over 1912 1995 for brazil it is found that money is long run neutral but not long run superneutral with regard to real output a rise in money growth is associated with a decline in output the opposite of the tobin effect the introduction of dummy variables for 1930s or to capture recent periods of financial disruption associated with bank insolvencies does not restore long run superneutrality for either country however results indicate that bank insolvency episodes have a distinct and negative influence on output

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

new estimates of the canadian money stock 1871 1967 in this paper the authors construct historical data series beginning in 1871 for canadian m1 m2 and monetary base the new series are at a monthly frequency and use the bank of canada s definition of the monetary aggregates institutional and reporting changes however make perfect backwards extrapolation of the bank s series impossible there are only end of month data rather than average weekly since january 1994 daily data and the authors cannot precisely match savings accounts at chartered banks and trust companies that are included in the modern monetary aggregates their adjustments for these changes and their impact on the aggregates are documented

gross loan flows we present a series of stylized facts about gross loan flows and how they vary over time bank size and region we define loan creation as the sum of the change in bank loans at all banks that increased loans since last quarter loan destruction is similarly defined as the absolute value of the change in loans at all banks that decreased loans the gross flow akin to what the labor literature calls reallocation is the sum of creation and destruction

a real model of the world business cycle abstract in this paper a stochastic two country log linear infinite horizon model is used to analyze the generation and transmission of economic fluctuations across countries it is argued that following a country specific supply disturbance production interdependence and unitary elasticities in consumption and production are sufficient to generate comovements in aggregate economic activity investment and trade that are persistent over time and positively correlated across countries however the empirical analysis carried out for the usa japan germany and uk for the 1960 82 period suggests that common shocks rather than trade links are responsible for this pattern of comovements

the macroeconomics of the great depression a comparative approach recently research on the causes of the great depression has shifted from a heavy emphasis on events in the united states to a broader more comparative approach that examines the interwar experiences of many countries simultaneously in this lecture i survey the current state of our knowledge about the depression from a comparative perspective on the aggregate demand side of the economy comparative analysis has greatly strengthened the empirical case for monetary shocks as a major driving force of the depression an interesting possibility suggested by this analysis is that the worldwide monetary collapse that began in 1931 may be interpreted as a jump from one nash equilibrium to another on the aggregate supply side comparative empirical studies provide support for both induced financial crisis and sticky nominal wages as mechanisms by which nominal shocks had real effects still unresolved is why nominal wages did not adjust more quickly in the face of mass unemployment this abstract was borrowed from another version of this item

the spectre of deflation a review of empirical evidence what explains the widespread fear of deflation this article reviews the history of thought economic history and empirical evidence on deflation with a view to answering this question it also outlines informally the main effects of deflation in applied monetary models the main finding is that for both historical and contemporary deflations there are many open empirical questions that could be answered using the tools economists use to study inflation and monetary policy more generally qu est ce qui explique la peur tres repandue de la deflation ce memoire fait un tour d horizon de l histoire de la pensee economique de l histoire economique et des resultats empiriques quant aux effets de la deflation en vue de repondre a cette question on fait aussi echo informellement aux effets principaux de la deflation dans les modeles monetaires appliques ce qui ressort principalement de ce travail est que tant pour les deflations dans l histoire que dans le monde contemporain il y a bien des questions empiriques encore irresolues auxquelles on pourrait donner une reponse en utilisant l outillage mental que les economistes utilisent pour etudier l inflation et la politique monetaire plus generalement sp c tre n thing that is thought to be seen but has no material existence haunting presentiment of ruin war madness etc

financial crisis and the great depression a regime switching approach i explore the timing of and effects of the u s financial crisis of the 1930s in a regime switching framework estimated conditional probabilities over the state of the financial sector suggest that a prolonged period of crisis begins not with the 1929 stock market crash but with the first banking panic of october 1930 these probabilities also suggest that the crisis persists until the introduction of federal deposit insurance in early 1934 consistent with the view that this financial crisis had real effects these conditional probabilities contain additional explanatory power for output fluctuations this is in addition to that provided by the money stock

seigniorage and the case for national money in countries with high rates of inflation there is typically movement away from the use of the local currency the paper analyzes the costs and benefits of using a local currency with emphasis on the seigniorage foregone by using a foreign money even if it should be desirable for a country to fix its exchange rate it still loses seigniorage if it does not use its own money the case for using a foreign money then turns largely on the superior discipline imposed on domestic policymakers by removing their control over the money supply alternative methods of imposing discipline are discussed estimates of the amount of seigniorage raised by different governments are presented seigniorage amounts in some cases to about 10 percent of government revenue estimates are also presented of both the annual flow and one time stock costs of giving up use of domestic currencies and instead using the dollar the flow cost is typically about 1 percent of gnp and the stock cost is around 10 percent of gnp

do capital market imperfections exacerbate output fluctuations abstract we develop a dynamic general equilibrium macroeconomic model where a proportion of firms are credit constrained due to asymmetric information in general a macroeconomic shock has additional effects created by a reallocation of funds between credit constrained and unconstrained firms as they have different marginal productivities we show however that the output response to shocks is not necessarily amplified and can be dampened by the presence of asymmetric information this depends on the impact of the shock on the composition of external and internal funds for credit constrained firms

the missing transmission mechanism in the monetary explanation of the great depression for many friedman and schwartz s monetary history of the united states 1963 is synonymous with the notion that monetary contraction and errors by the federal reserve caused the great depression but this quick summary both sells the book short and oversells its findings about the 1930s it sells the book short because the contributions of the monetary history extend far beyond the depression friedman and schwartz use an extensive reading of the historical record over nearly a century to identify times when the money supply moved for reasons unrelated to current or prospective macroeconomic conditions that output moved in the same direction as money following these crucial experiments remains some of the strongest evidence we have that monetary shocks have real effects but saying the book proves that monetary shocks caused the depression is a stretch of the monetary shocks friedman and schwartz identify those early in the depression are arguably the most tenuous and crucially the book provides scant discussion of how monetary shocks affect the economy this weakness is most pressing in the analysis of the depression because nominal interest rates fell precipitously early in the depression and remained low throughout it is hard to appeal to the standard transmission mechanism operating through the nominal cost of credit this paper seeks to fill in the missing transmission mechanism in friedman and schwartz s explanation of the depression in section i we describe previous work showing that falling

budget deficits and social protection cyclical government expenditure in the oecd countercyclical government spending offers social protection to the vulnerable when economies move into recession this paper questions the extent to which governments are able to spend countercyclically and the extent to which social expenditures are likely to be countercyclical an analysis of public spending in oecd countries 1980 2005 suggests countercyclical social protection is constrained by the limits to public borrowing and the degree of political polarization

testing short run neutrality abstract this paper derives and implements a robust test of the short run neutrality of anticipated policy that is valid when the information set used to form expectations is incorrectly specified and the effect of unanticipated policy on deviations of output from the natural rate varies over time the test is based on the observation that if unanticipated policy affects output with a maximum lag of n quarters then any information prior to n should be uninformative about output movements the test is applied to quarterly data for the united states and the paper concludes that policy is not neutral

currency elasticity and banking panics theory and evidence existing models of banking panics contain no role for monetary factors and fail to explain why some banking systems experienced panics while others did not a monetary model is constructed where seasonal variations in the demand for liquidity and credit play a critical role in generating banking panics these panics occur when there are restrictions on the issue of currency in private banks but they do not occur if banks are unrestricted empirical evidence from canada and the united states for the period 1880 1910 is largely consistent with the predictions of the model

the voracity effect abstract we analyze an economy that lacks a strong legal political institutional infrastructure and is populated by multiple powerful groups powerful groups dynamically interact via a fiscal process that effectively allows open access to the aggregate capital stock in equilibrium this leads to slow economic growth and a voracity effect by which a shock such as a terms of trade windfall perversely generates a more than proportionate increase in fiscal redistribution and reduces growth we also show that a dilution in the concentration of power leads to faster growth and a less procyclical response to shocks jel f43 o10 o23 o40

why is fiscal policy often procyclical many countries especially developing ones follow procyclical fiscal policies namely spending goes up taxes go down in booms and spending goes down taxes go up in recessions we provide an explanation for this suboptimal fiscal policy based upon political distortions and incentives for less than benevolent government to appropriate rents voters have incentives similar to the starving the leviathan classic argument and demand more public goods or fewer taxes to prevent governments from appropriating rents when the economy is doing well we test this argument against more traditional explanations based purely on borrowing constraints with a reasonable amount of success

stability in the absence of deposit insurance the canadian banking system 1890 1966 the canadian banking system experienced a prolonged period of stability prior to the introduction of deposit insurance in 1967 documenting the reasons for this stability provides important evidence in the debate over the impact of mandatory flat rate deposit insurance in this paper we use new archival data to refute recent claims that this stability resulted from an implicit deposit insurance scheme managed by canada s largest banks and guaranteed by the federal government we argue that the canadian banking system was stable for two reasons first the absence of deposit insurance provided incentives for both prudence on the part of management and monitoring by depositors and regulators second the absence of unit banking and other regulatory barriers to competition facilitated efficient mergers which produced a relatively small number of well managed banks copyright 1995 by ohio state university press

the nonmonetary effects of financial factors during the interwar period i introduction in a monetary history of the united states friedman and schwartz 1963 attributed the enormous decline in real output and prices during the great depression of 1929 1933 to an unprecedented fall in the supply of money while there is much support today for the view that money played an important role in this episode many economists feel that this variable alone does not provide a sufficiently complete explanation of the link between the chaotic conditions in the u s financial sector and aggregate output and prices bernanke 1983 contended in an influential paper that financial shocks had important nonmonetary effects on aggregate economic activity in addition to their effects via the supply of money rather than consider the 1929 33 episode outside of its context bernanke widened his sample to include the entire interwar period which he defined as january 1919 december 1941 the major purpose of this paper is to present empirical evidence on the importance of the nonmonetary effects of financial factors in explaining fluctuations in real output and prices during the interwar period we define the interwar period as august 1922 june 1938 by omitting from our sample a few years immediately following world war i and immediately preceding world war ii we avoid the potential problems connected with war related government expenditures and autonomous gold flows discussed in joines 1985 our interwar period corresponds closely to the four peacetime cycles identified by firestone 1960 the theoretical literature on the nonmonetary effects of financial factors focuses on two related but distinct aspects 1 first studies by bernanke and blinder 1988 williamson 1987a 1987b bernanke and gertler 1987 and scheinkman and weiss 1986 demonstrate that the efficiency with which banks perform their intermediation function is an independently important determinant of the level of real economic activity second bernanke and gertler 1989 1990 gertler and hubbard 1988 and calomiris and hubbard 1990 focus on the effects of shocks to borrowers net worth positions on aggregate economic activity this approach suggests that exogenous shocks to borrowers net worth may be a source of economic fluctuations therefore for example to the extent that a deflation is unanticipated it is likely to erode borrowers net worth and thereby adversely affect aggregate economic activity beginning with fisher 1933 this deflation story has played an important role in studies such as bernanke 1983 hamilton 1987 and bernanke and james 1990 that attempt to explain the great depression in evaluating the effects of financial sector shocks during the great depression bernanke 1983 argued that in addition to the traditional monetary effects of adverse shocks to financial intermediation stressed by friedman and schwartz 1963 these shocks increased the cost of credit intermediation which in turn led to credit contraction rejection of otherwise profitable projects and subsequent falls in output to test this hypothesis bernanke included the deposits of failing banks and the liabilities of failing businesses as joint proxies for the cost of credit intermediation in a barro 1977 type output equation that also included unanticipated money both the deposits of failing banks and liabilities of failing businesses were found to be significant moreover dynamic simulations of the path of output for the period between mid 1930 and march 1933 accounted for substantially more of the actual decrease in output than was captured when only unanticipated money was included in the output equation in place of the joint proxies bernanke also used the yield differential between baa corporate and long term u s government bonds as a proxy for credit intermediation costs in all cases entry of the credit cost proxies significantly increased the percentage of the decline in output that was captured

an historical decomposition of the great depression to determine the role of money abstract the innovation accounting technique of historical decomposition seems ideally suited as a vehicle for a re examination of money s role during the depression its application using u s monthly data for 1919 to 1941 reveals that innovations in money exerted a considerable influence on prices and output after october 1929 although the depth of the depression and the extent of the subsequent recovery cannot be attributed solely to monetary factors an important albeit occasionally diminished monetary effect is also identified even when a passive contemporaneous response by money to price and output fluctuations is assumed not to contribute to the effect

inflationary expectations and the fisher effect prior to world war i we use univariate and multivariate techniques to estimate the expected price level changes for the u s during the pre world war i period we also examine contemporaneous evidence from agricultural commodity futures markets to measure inflationary expectations using previously neglected data on consumer prices and a variety of techniques we draw three main conclusions not traditionally found for this period 1 price level changes were not white noise 2 a significant portion of deflationary and inflationary episodes was indeed expected and 3 expected inflation is positively and significantly correlated with nominal interest rates thus providing support for a short run fisher effect

gresham s law or gresham s fallacy gresham s law often takes two forms the rule that bad money drives out good money and a qualified version of that rule that requires a fixed exchange rate between the two monies yet history contr

bank panics and the endogeneity of central banking abstract central banking is intimately related to liquidity provision to banks during times of crisis the lender of last resort function this activity arose endogenously in certain banking systems depositors lack full information about the value of bank assets so that during macroeconomic downturns they monitor their banks by withdrawing in a banking panic the likelihood of panics depends on the industrial organization of the banking system banking systems with well diversified big banks are less prone to inefficient bank runs because diversification alleviates the information asymmetry in addition big banks can self monitor through publicly observable branch closure systems of many small banks form incentive compatible bank coalitions to emulate the big banks during times of crisis such coalitions improve efficiency by monitoring member banks and issuing money that is a kind of deposit insurance a precursor of central banking

why do more polarized countries run more procyclical fiscal policy abstract we study the cyclical behavior of fiscal policy to explain why some countries exhibit procyclical fiscal policy stances being expansionary in good times and contractionary in bad times we develop a model that links the polarization of preferences over fiscal spending to the procyclicality bias we then present evidence that social polarization as measured by income inequality and educational inequality is consistently and positively associated with fiscal procyclicality even after controlling for other determinants from existing theories we also find a strong negative impact of fiscal procyclicality on economic growth

the timing of monetary and price changes and the international transmission of inflation this paper presents a theoretical and empirical investigation into timing relationships between variables within and across industrialized countries the main empirical results of our analysis are 1 domestic monetary expansion appears to lead inflation in the sense that money granger causes prices without feedback contradicting an implication of the monetary approach to the balance of payments 2 hardly any significant timing relationship exists between domestic and foreign rates of inflation during the fixed exchange rate period providing no evidence for a generalized law of one price 3 some sterilization of official reserve inflows was successfully performed by the non reserve central banks except for canada 4 u s interest rates granger cause foreign rates providing evidence of some international transmission via asset markets

who anticipated the great depression gustav cassel versus keynes and hayek on the interwar gold standard the intellectual response to the great depression is often portrayed as a battle between the ideas of friedrich hayek and john maynard keynes yet both the austrian and the keynesian interpretations of the depression were incomplete austrians could explain how a country might get into a depression bust following a credit fueled investment boom but not how to get out of one liquidation keynesians could explain how a country might get out of a depression government spending on public works but not how it got into one animal spirits by contrast the monetary approach of gustav cassel has been ignored as early as 1920 cassel warned that mismanagement of the gold standard could lead to a severe depression cassel not only explained how this could occur but his explanation anticipates the way that scholars today describe how the great depression actually occurred unlike keynes or hayek cassel analyzed both how a country could get into a depression deflation due to tight monetary policies and how it could get out of one monetary expansion

the deposits channel of monetary policy we propose and test a new channel for the transmission of monetary policy we show that when the fed funds rate increases banks widen the interest spreads they charge on deposits and deposits ow out of the banking system we present a model in which imperfect competition among banks gives rise to these relationships an increase in the nominal interest rate increases banks market power inducing them to increase deposit spreads and hence restrict deposit supply households respond to the increase in deposit prices by substituting from deposits into less liquid but higheryielding assets consequently changes in the nominal interest rate aect banks cost of capital and lending using branch level data on the universe of u s banks we show that following an increase in the fed funds rate deposit spreads increase by more and supply falls more in areas with less deposit competition we control for changes in banks lending opportunities by comparing branches of the same bank we control for changes in macroeconomic conditions by showing that deposit spreads widen immediately after a rate change and even if this change is fully anticipated our results imply that monetary policy has a signicant impact on how the nancial system is funded on the quantity of safe and liquid assets it produces and on its provision of loans to the real economy

a laissez faire approach to monetary stability this paper develops some diverse hints for a new monetary system offered separately by fischer black eugene fama and robert e hall for reasons that will become evident though we should perhaps say payments system instead of monetary system none of the economists mentioned has actually proposed the particular system set forth here nor examined all its properties and we call it the bfh system not to implicate them but only to give credit for some component ideas and to have a convenient label l regardless of who if anyone may actually advocate the system contemplating it is instructive it illuminates by contrast some characteristics of our existing and recent systems

the cyclical behaviour of fiscal policy evidence from the oecd this paper addresses the topic of cyclicality in scal policy in particular we show that the level of cyclicality varies across spending categories and across oecd countries in line with leading theories of scal cyclicality we show that countries with volatile output and dispersed political power are the most likely to run procyclical scal policies wage government consumption is highlighted as the most important channel by which these variables affect scal cyclicality

employment and unemployment in the 1930s the great depression is to economics what the big bang is to physics as an event the depression is largely synonymous with the birth of modern macroeconomics and it continues to haunt successive generations of economists with respect to labor and labor markets these facts evidently include wage rigidity persistently high unemployment rates and long term joblessness traditionally aggregate time series have provided the econometric grist for distinguishing explanations of the great depression recent research on labor markets in the 1930s however has shifted attention from aggregate to disaggregate time series and towards microeconomic evidence this shift in focus is motivated by two factors first disaggregated data provide many more degrees of freedom than the decade or so of annual observations associated with the depression and thus may prove helpful in distinguishin g macroeconomic explanations second disaggregation has revealed aspects of economic behavior hidden in the time series that may be essential to their proper interpretation and in any case are worthy of study in their own right although the substantive findings of recent research are too new to judge their permanent significance i believe that the shift towards disaggregated analysis is an important contribution the paper begins by reviewing the conventional statistics of the united states labor market during the great depression and the paradigms to explain them it then turns to recent studies of employment and unemployment using disaggregated data of various types the paper concludes with discussions of

the flypaper effect identifying areas for further research the flypaper effect literature dates back three decades it is overwhelmingly neo classical in approach attempting to improve the median voter demand model and or temper it with public choice supply side perspectives whilst this approach provided valuable early substantial analytical insights more recent papers seem to have contributed only marginally to an understanding of the flypaper effect if indeed it exists at all hence as well as providing a long overdue comprehensive review of the literature on the flypaper effect this paper identifies more productive avenues for further research

economists and the analysis of government failure fallacies in the chicago and virginia interpretations of cambridge welfare economics the theory of government failure was developed as a reaction against pigovian welfare economics and the cambridge approach to economic policy analysis generally which ostensibly lacked a theory of governmental behaviour we argue that the cambridge tradition as reflected in the writings of henry sidgwick alfred marshall and a c pigou evidences a clear sense of the potential limitations and inefficiencies of the political process that were later developed albeit in a more systematic fashion in the government failure literature and at the same time bring out the ways in which the cambridge and contemporary government failure approaches diverge in spite of their strong similarities copyright the authors 2012 published by oxford university press on behalf of the cambridge political economy society all rights reserved oxford university press

innovation accounting for the impact of fluctuations in u s variables on the canadian economy innovation accounting is conducted on a nine variable vector autoregression estimated using u s and canadian monthly data for january 1971 to december 1983 this reveals inter alia a positive impact of the u s interest rate on the canadian rate with the role the exchange rate plays in cushioning this impact being clearly apparent a positive effect of the u s money supply on both u s and canadian interest rates a positive albeit muted response of canadian production to a shock in u s production and a persistent influence of u s prices on production negatively and prices positively in canada are also detected l impact des fluctuations dans les variables americaines sur l eonomie canadienne une analyse utilisant la technique d innovation accounting les auteurs utilisent la technique d innovation accounting dans le cadre d un systeme a neuf variables estime comme autoregression vectorielle a l aide de donnees mensuelles canadiennes et americaines couvrant la periode de janvier 1971 a decembre 1983 cette analyse revl un effet positif de la masse monetaire americaine a la fois sur les taux d interet canadiens et americains une reaction positive mais en sourdine du niveau de production au canada a un choc dans le niveau de production americaine et une influence persistence des niveaux de prix americains sur le niveau de production au canada influence negative ainsi que sur les niveaux de prix canadiens influence positive we should like to thank gordon anderson douglas clarke john kennan john kuszczak angelo melino and stanely winer for a number of helpful discussions earlier versions of the paper were presented at the meetings of the canadian economics association in vancouver in june 1983 at the winter meetings of the econometric society in san francisco in december 1983 and in a session of invited papers at the meetings of the canadian economics association in guelph in june 1984 our discussants jacques raynauld in vancouver thomas doan and stephen king in san francisco and allan gregory in guelph offered many useful comments as too did the members of the money macro workshop at the university of western ontario alan harrison also thanks the economics department at the university of warwick for its hospitality and the social science and humanities research council of canada for financial support canadian journal of economics revue canadienne d economique xviii no 4 november novembre 1985 printed in canada imprime au canada 0008 4085 85 784 98 1 50 canadian economics association this content downloaded from 40 77 167 14 on fri 16 sep 2016 06 02 12 utc all use subject to http about jstor org terms impact of fluctuations in us variables 785

procyclical government spending a public choice analysis procyclical government spending occurs when government expenditures increase at a faster rate than income in an economic upturn but fall at a faster rate in a recession voracity effects occur when competition for increased spending proves more effective as national income increases public choice theory can be applied to describe the distribution of fiscal power across different tiers of government to shed insight into competition for intergovernmental transfers politicians have electoral incentives to press for intergovernmental transfers but they also have electoral incentives to signal their ability to manage the economy with this mix of incentives the prediction is that intergovernmental transfers will be procyclical and that sub central government spending will be more procyclical than central government spending public choice analysis of pressure for increased public spending predicts a specific pattern of cyclical government spending this pattern can be observed when analyzing government expenditures in 20 oecd countries between 1995 and 2006

an integrated view of tests of rationality market efficiency and the short run neutrality of monetary policy abstract this paper analyzes an important class of models in which expectations play an important role topics included in the analysis are tests of 1 rationality of forecasts in either market or survey data 2 capital market efficiency 3 the short run neutrality of monetary policy and 4 granger causality in macroeconometric models the common elements of these tests are highlighted in particular cross equation tests for rationality or the short run neutrality of money are shown to be equivalent to more common regression tests in the literature these results demonstrate that the exact specification of the relevant information set used in rational forecasts is not necessary for the cross equation tests to have desirable asymptotic properties also discussed are the conditions for identification of coefficients and testability of hypotheses

government science and technology budgets in times of crisis abstract following a recent paper by filippetti and archibugi filippetti a archibugi d 2011 innovation in times of crisis national systems of innovation structure and demand research policy 40 2 179 192 this article aims to contribute to the sparse literature on the impacts of the recent economic downturn on the government expenditures and innovative activities of the countries of the enlarged european union eu 27 using eurostat s socio economic objectives i e the nomenclature for the analysis and comparison of scientific programmes and budgets nabs 2007 classification this paper addresses the impact of the recent economic downturn on governments science and technology s t budgets across the 27 eu countries most countries followed a pro cyclical pattern where the government s t budgets in most nabs shrunk along slowing gross domestic product growth in similar pace with total government expenditure the new member states of eastern europe were the most affected

pigou s wealth and welfare a centenary assessment pigou s wealth and welfare offered a programme of action that was potentially very interventionist any economic policy should be assessed he proposed by its expected effect on the size distribution and variability of the national dividend his programme though rough and ready has proved to be more useful than the new welfare economics which tended to leave distributional questions for others and efficiency questions to competitive markets pigou himself however took a conservative view of what might be done in practice the impact of policies on the size distribution and variability of income is still a central focus of both popular and technical interest some of the issues now recognised as important to well being such as welfare in unequal societies and the experience of unemployment may be subsumed into pigou s three criteria

output fluctuations and fiscal policy u s state and local governments 1978 1994 abstract we study the cyclical properties of u s state and local government fiscal policy the budget surpluses of both are procyclical over short and medium term horizons procyclical surpluses are the result of strongly procyclical revenue and weakly procyclical expenditure these results hold whether aggregate u s wide fluctuations are controlled for or not federal grants to state and local governments are procyclical but this is due to aggregate output fluctuations with respect to state level output fluctuations federal grants are countercyclical the budget surpluses of trust funds and utilities are also procyclical but there is no evidence that this effect is stronger in states where balanced budget rules are tighter the cyclical patterns of state and local budget surpluses are affected by various political institutions for example budget surpluses are less procyclical in conservative states in an election year that occurs in good times state governments refrain from accumulating a larger surplus in bad times no such asymmetry between election and non election years is apparent

the great crash and the onset of the great depression this paper argues that the collapse of stock prices in october 1929 generated temporary uncertainty about future income which led consumers to forgo purchases of durable goods that the great crash generated uncertainty is evidenced by the decline in surety expressed by contemporary forecasters that this uncertainty affected consumer behavior is shown by the fact that spending on consumer durables declined drastically in late 1929 while spending on perishable goods rose slightly this effect is confirmed by the fact that there is a significant negative relationship between stock market variability and the production of consumer durables in the prewar era

the eurozone expected inflation an option s eyes view abstract we estimate inflation risk neutral densities rnds in the euro area using inflation swaps and caps floors options and introduce a parsimonious approach to jointly estimate the rnds across horizons thus we obtain daily implicit rnds for forward measures such as the 5 year on 5 year inflation rate which although not directly traded in the market is a key reference for monetary policy then we discuss several indicators derived from the information content of those historical rnds that are relevant for policy makers and compare them in light of the ecb s decisions and communication since 2009 specifically we study the evolution of tail risks associated with deflation and high inflation the balance of inflation risks risk aversion and how forward inflation rates react to the ecb s non conventional monetary policies longer term refinancing operations ltro securities market programme smp asset purchase programme app and its variants and extensions

financial structure and aggregate economic activity an overview this paper surveys literature that explores the possible links between the financial system and aggregate economic behavior the survey is in two parts the first reviews the traditional work and the second discusses new research copyright 1988 by ohio state university press

interwar inflation unexpected inflation and output growth interwar macroeconomic history is a natural place to look for evidence on the correlation between output growth and inflation or unexpected inflation we apply time series methods to measure unexpected inflation for more than 20 countries using both retail and wholesale prices there is a significant positive correlation between output growth and inflation for the entire period there is little evidence that this correlation is caused by an underlying role for unexpected inflation for wholesale price inflation in particular the output declines associated with deflations were larger than the output increases associated with inflations of the same scale

how big a problem is too big to fail a review of gary stern and ron feldman s too big to fail the hazards of bank bailouts this review essay examines whether too big to fail is as serious a problem as gary stern and ron feldman contend this essay argues that stern and feldman overstate the importance of the too big to fail problem and do not give enough credit to the fdicia legislation of 1991 for improving bank regulation and supervision however this criticism of the stern and feldman book does not detract from many of its messages the policy recommendations in their book have merit even if the too big to fail problem is currently not that serious because these policies make it less likely that a banking crisis will occur even if driven by other factors

pigou and future generations a cambridge tradition in the economics of welfare and elsewhere a c pigou took the view that future people should be treated equally with present people he stressed our defective telescopic faculty mortality and weak linkages over time and argued that the present generation would consequently devote too few resources to investment particularly in human capital pigou linked his argument with the then contemporary controversies about natural resource conservation and about eugenics this cambridge tradition holds that issues of generational justice leave an important role for the state and cannot be resolved simply at the level of the individual or the family c 1996 academic press limited copyright 1996 by oxford university press

prices during the great depression was the deflation of 1930 1932 really unanticipated this paper examines inflationary expectations in order to investigate whether the deflation of 1930 32 could have been anticipated the major conclusion is that beginning in late 1930 and possibly as early as late 1929 deflation could have been anticipated at horizons of three six months this implies in turn that short run ex ante real interest rates were very high during the initial phases of the great depression these results provide further support for the proposition that monetary contraction was the driving force behind the economic decline copyright 1992 by american economic association

suspension of payments bank failures and the nonbank public s losses abstract we present evidence on the effects of suspensions of payments from an episode that is close to a controlled experiment for examining those effects in 1861 about 44 of the banks in wisconsin closed 81 of the banks in illinois closed and noteholders suffered substantial losses the historical record suggests that an effective suspension of payments in wisconsin but not in illinois may explain the difference our statistical evidence indicates that the suspension of payments increased the probability of a bank remaining open by about 21 percentage points and decreased noteholders losses by about 14 cents per dollar

canadian banking solvency 1922 1940 the use of market value accounting to restate the year end balance sheets for canadian banks strongly suggests that only one surviving bank was economically solvent during the depression like u s s ls the authors alternative hypothesis argues that canadian banks continued to operate because of the canadian government s forebearance policy of providing an implicit 100 percent guarantee of bank deposits standing ready to lend to banks and encouraging early mergers of troubled and healthier banks unlike the stylized fact the role of national branching was to facilitate this policy by reducing the number of banks and lessening competition copyright 1993 by ohio state university press

monetary factors in the great depression this paper examines the role of monetary policy in the early stages of the great depression and considers the mechanism whereby this policy may have affected real activity i conclude that the depression was preceded by a dramatic shift towards a highly contractionary monetary policy the economic impact of this policy seems unlikely to have come through the conventional keynesian channels of a shortage of liquidity and high ex ante real interest rates but instead may have operated through unanticipated deflation and after 1930 through the disruption of financial intermediation as a consequence of the banking panics

an examination of the asymmetric effects of money supply shocks in the pre world war i and interwar periods we test whether monetary shocks had asymmetric output effects before world war ii ball and mankiw 1994 show that expectations of persistent inflation under fiat money can explain why negative monetary shocks had larger effects than positive shocks after world war ii consistent with this explanation we find such asymmetry in the interwar period following the abandonment of the gold standard and before it when agents arguably anticipated this development we find no monetary asymmetry before world war i which is consistent with ball and mankiw 1994 because under a credible gold standard agents do not expect persistent inflation jel e31 es2

further evidence on the credit view the case of finland the present paper provides further empirical evidence on the credit view i e bank credit availability has a positive impact on macroeconomic activity by investigating the case of finland the finnish economy suffered a severe recession in the early 1990s that was marked by widespread banking crisis and extensive government intervention using monthly data for the 1980 1996 period unrestricted and restricted vector autoregression var models with gdp money supply consumer prices bank credit and exports were estimated it is found that while money supply had the largest effect on economic output bank credit exhibited a fairly strong effect on output that exceeded price effects for the most part exports had little impact on fluctuations in gdp but did help to explain industrial output changes over time based on these results it is concluded that there is empirical support for the credit view in finland by implication government intervention in finland to restore safety and soundness during t

federal lending and aggregate economic activity attention to federal activity in credit markets is typically focused on the government s role as a borrower in contrast scant attention is paid to its equally large and dominant role as a lender this paper evaluates the aggregate impact of federal lending activity within the framework of a vector autoregressive representation of the us macroeconomy the empirical regularities uncovered suggest that aggregate federal lending activity does not have a net positive impact on output

who borrows from the lender of last resort understanding why banks borrow from the lender of last resort lolr during a nancial crisis is crucial to understanding the macroeconomic impact of such largescale interventions we document a strong divergence among banks take up of lolr assistance during the nancial crisis in the euro area as banks which borrowed heavily also used increasingly risky collateral we propose four explanations for this divergence

was the new deal contractionary can government policies that increase the monopoly power of firms and the militancy of unions increase output this paper shows that the answer is yes under certain emergency conditions these emergency conditions zero interest rates and deflation were satisfied during the great depression in the united states the new deal which facilitated monopolies and union militancy was therefore expansionary in the model presented this conclusion is contrary to a large previous literature the main reason for this divergence is that this paper incorporates rigid prices and the zero bound on the short term interest rate jel e23 e32 e52 e62 j51 n12 n42