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The Great Depression and the Friedman-Schwartz hypothesis
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.
AUTHORS: Motto, Roberto; Christiano, Lawrence J.; Rostagno, Massimo
An econometric analysis of UK money demand in MONETARY TRENDS IN THE UNITED STATES AND THE UNITED KINGDOM by Milton Friedman and Anna J. Schwartz
This paper evaluates an empirical model of UK money demand developed by Friedman and Schwartz in Monetary Trends... .Testing reveals mis-specification and hence the potential for an improved model. Using recursive procedures on their annual data, we obtain a better-fitting, constant, dynamic error-correction (cointegration) model. Results on exogeneity and encompassing imply that our money-demand model is interpretable as a model of money but not of prices since its constancy holds only conditional on contemporaneous prices.
AUTHORS: Ericsson, Neil R.; Hendry, David F.