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Federal Reserve Bank of Cleveland
Working Papers (Old Series)
The Great Depression and the Friedman-Schwartz hypothesis
Lawrence J. Christiano
Roberto Motto
Massimo Rostagno

The authors evaluate the Friedman-Schwartz hypothesis--that a more accommodative monetary policy could have greatly reduced the severity of the Great Depression. To do this, they first estimate a dynamic, general equilibrium model using data from the 1920s and 1930s. Although the model includes eight shocks, the story it tells about the Great Depression turns out to be a simple and familiar one. The contraction phase was primarily a consequence of a shock that induced a shift away from privately intermediated liabilities, such as demand deposits and liabilities that resemble equity, and towards currency. The slowness of the recovery from the Depression was due to a shock that increased the market power of workers. The authors identify a monetary base rule that responds only to the money demand shocks in the model.

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Lawrence J. Christiano & Roberto Motto & Massimo Rostagno, The Great Depression and the Friedman-Schwartz hypothesis, Federal Reserve Bank of Cleveland, Working Papers (Old Series) 0318, 2004.
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Keywords: Depressions ; Financial crises ; Friedman; Milton ; Schwartz; Anna Jacobson ; Monetary policy
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