The mistake of 1937 : a general equilibrium anlaysis

This paper studies a dynamic general equilibrium model with sticky prices and rational expectations in an environment of low interest rates and deflationary pressures. We show that small changes in the public’s beliefs a
This paper studies a dynamic general equilibrium model with sticky prices and rational expectations in an environment of low interest rates and deflationary pressures. We show that small changes in the public’s beliefs about the future inflation target of the government can lead to large swings in both inflation and output. This effect is much larger at low interest rates than under regular circumstances. This highlights the importance of effective communication policy at zero interest rates. We argue that confusing communications by the US Federal Reserve, the President of the United States, and key administration officials about future price objectives were responsible for the sharp recession in the US in 1937-38, one of the sharpest recessions in US economic history. Poor communication policy is the mistake of 1937. Before committing the mistake of 1937 the US policy makers faced economic conditions that are similar in some respect to those confronted by Japanese policy makers in the first half of 2006. JEL Classification: E32, E52, E61
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Metadaten
Author:Gauti B. Eggertsson, Benjamin Pugsley
URN:urn:nbn:de:hebis:30-38154
Series (Serial Number):CFS working paper series (2007, 06)
Document Type:Working Paper
Language:English
Date of Publication (online):2007/02/23
Year of first Publication:2007
Publishing Institution:Univ.-Bibliothek Frankfurt am Main
Release Date:2007/02/23
Tag:Central Bank Communication ; Sticky Prices ; Stochastic General Equilibrium Model
Note:
November 2006
HeBIS PPN:190226382
Institutes:Center for Financial Studies (CFS)
Dewey Decimal Classification:330 Wirtschaft
Sammlungen:Universitätspublikationen
Licence (German):License Logo Veröffentlichungsvertrag für Publikationen

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