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Working Paper
Export-Led Decay: The Trade Channel in the Gold Standard Era
Flexible exchange rates can facilitate price adjustments that buffer macroeconomic shocks. We test this hypothesis using adjustments to the gold standard during the Great Depression. Using prices at the goods level, we estimate exchange rate pass-through. Using novel monthly data on city-level economic activity, combined with employment composition and sectoral export data, we show that American exporting cities were significantly affected by changes in bilateral exchange rates. With those results we calibrate a general equilibrium model to obtain aggregate effects from cross-sectional ...
Journal Article
Monetary policy in the United States: a brave new world?
This article is a reflection on monetary policy in the United States during Ben Bernanke?s two terms as Chairman of the Federal Open Market Committee, from 2006 to 2014. Inflation targeting, policy during the financial crisis, and post-crisis monetary policy (forward guidance and quantitative easing) are discussed and evaluated.
Working Paper
Did Doubling Reserve Requirements Cause the 1937-38 Recession? New Evidence on the Impact of Reserve Requirements on Bank Reserve Demand and Lending
In 1936-37, the Federal Reserve doubled member banks' reserve requirements. Friedman and Schwartz (1963) famously argued that the doubling increased reserve demand and forced the money supply to contract, which they argued caused the recession of 1937-38. Using a new database on individual banks, we show that higher reserve requirements did not generally increase banks' reserve demand or contract lending because reserve requirements were not binding for most banks. Aggregate effects on credit supply from reserve requirement increases were therefore economically small and statistically zero.
Working Paper
Recovery of 1933
When Roosevelt abandoned the gold standard in April 1933, he converted government debt from a tax-backed claim to gold to a claim to dollars, opening the door to unbacked fiscal expansion. Roosevelt followed a state-contingent fiscal rule that ran nominal-debt-financed primary deficits until the price level rose and economic activity recovered. Theory suggests that government spending multipliers can be substantially larger when fiscal expansions are unbacked than when they are tax-backed. VAR estimates using data on "emergency" unbacked spending and "ordinary" backed spending confirm this ...
Working Paper
Banking panics and deflation in dynamic general equilibrium
This paper develops a framework to study the interaction between banking, price dynamics, and monetary policy. Deposit contracts are written in nominal terms: if prices unexpectedly fall, the real value of banks' existing obligations increases. Banks default, panics precipitate, economic activity declines. If banks default, aggregate demand for cash increases because financial intermediation provided by banks disappears. When money supply is unchanged, the price level drops, thereby providing incentives for banks to default. Active monetary policy prevents banks from failing and output from ...
Working Paper
Did Doubling Reserve Requirements Cause the 1937-38 Recession? New Evidence on the Impact of Reserve Requirements on Bank Reserve Demand and Lending
In 1936-37, the Federal Reserve doubled member banks' reserve requirements. Friedman and Schwartz (1963) famously argued that the doubling increased reserve demand and forced the money supply to contract, which they argued caused the recession of 1937-38. Using a new database on individual banks, we show that higher reserve requirements did not generally increase banks' reserve demand or contract lending because reserve requirements were not binding for most banks. Aggregate effects on credit supply from reserve requirement increases were therefore economically small and statistically zero.
Working Paper
Navigating Constraints: The Evolution of Federal Reserve Monetary Policy, 1935-59
The 1950s are often pointed to as a decade in which the Federal Reserve operated a particularly successful monetary policy. The present paper examines the evolution of Federal Reserve monetary policy from the mid-1930s through the 1950s in an effort to understand better the apparent success of policy in the 1950s. Whereas others have debated whether the Fed had a sophisticated understanding of how to implement policy, our focus is on how the constraints on the Fed changed over time. Roosevelt Administration gold policies and New Deal legislation limited the Fed's ability to conduct an ...
Working Paper
The FOMC’s Use of Operational Targets: 85 Years and Counting
This paper uses summaries of the Federal Open Market Committee’s (FOMC’s) meetings to identify its operational targets and map those to operating regimes. We find that operational targets were more often discussed in the earlier part of the FOMC’s 85-year history, but recent years have seen a resurgence in discussions. We identify distinct operating regimes and findthat regimes with discussions of multiple targets, usually rate and quantity pairs, are more common than regimes dominated by discussions of single targets. We document that the current period (the 2007-2009 financial crisis ...
Journal Article
When Tight Is Too Tight: The Federal Reserve’s Response to the Post-World War II Spike in Inflation
With the end of World War II, the massive expansion of defense spending came to a halt, and the money supply financing it quickly stabilized. However, the real money supply declined further with the transitory inflationary upswing of 1946–47, which fueled deflationary expectations, passively pushing up real interest rates and triggering the 1949 recession. We compare the Fed’s current stance to this historical episode, concluding that the ongoing tightening is already sufficient to normalize monetary conditions to prepandemic trends. This article also discusses how fiscal policy might ...
Working Paper
The FOMC’s Use of Operational Targets: 85 Years and Counting
This paper uses summaries of the Federal Open Market Committee’s (FOMC’s) meetings to identify its operational targets and map those to operating regimes. We find that operational targets were more often discussed in the earlier part of the FOMC’s 85-year history, but recent years have seen a resurgence in discussions. We identify distinct operating regimes and findthat regimes with discussions of multiple targets, usually rate and quantity pairs, are more common than regimes dominated by discussions of single targets. We document that the current period (the 2007-2009 financial crisis ...