Monetary factors in the great depression

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Abstract

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.

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    I am most grateful to Ben Bernanke, Charles Engel, Roger Farmer, Allen Meltzer, Ron Michener, and Anna Schwartz for comments on earlier drafts of this paper.

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