Lecture 7 Slides long - Economics 134 Spring 2012 Christina...

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L ECTURE 7 Monetary Factors in the Great Depression February 7, 2012 Economics 134 Christina Romer Spring 2012 David Romer
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Announcements Problem Set 1 was handed out on Thursday. It is due on Thursday, February 9, at the start of lecture. Problem sets will not be accepted after the start of lecture.
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I. M ONETARY A RRANGEMENTS IN THE 1920 S
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Early Federal Reserve Still learning its job. Initially NY Fed was dominant. Famous head, Benjamin Strong, died in October 1928. Starting in 1929, conflict between NY Fed, Board of Governors, and other FR banks. Friedman and Schwartz argue Fed was dysfunctional in early 1930s.
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Gold Standard System of fixed exchange rates. Price-specie flow mechanism: if prices fall in one country, gold will flow to that country leading to inflation and price equalization. Gold standard under pressure in 1920s. Many countries are low on gold reserves. Eichengreen stresses lack of credibility and cooperation.
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II. M ONETARY C ONTRACTION IN 1928
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Stock prices begin to rise rapidly in 1927 and 1928. 1.5 6.5 11.5 16.5 21.5 26.5 31.5 36.5 01/31/1922 05/31/1922 09/30/1922 01/31/1923 05/31/1923 09/30/1923 01/31/1924 05/31/1924 09/30/1924 01/31/1925 05/31/1925 09/30/1925 01/31/1926 05/31/1926 09/30/1926 01/31/1927 05/31/1927 09/30/1927 01/31/1928 05/31/1928 09/30/1928 01/31/1929 05/31/1929 Monthly Stock Prices 1922:1- 1929:8
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High-powered money fell in 1928. Source: James Hamilton, Journal of Monetary Economics , July 1987 .
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The Effects of Decline in M in the Money Market Diagram M/P i M 0 /P L(i,Y) i 0 M 1 /P i 1
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The Effects of Decline in M in the IS-LM Diagram Y r LM 0 IS 0 r 0 LM 1 r 1 Y 1 Y 0
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Real versus Nominal Interest Rates i = r + π e i is the nominal rate r is the real rate π e is expected inflation r = i - π e
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This note was uploaded on 02/28/2012 for the course ECON 134 taught by Professor Davidromer during the Spring '12 term at University of California, Berkeley.

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Lecture 7 Slides long - Economics 134 Spring 2012 Christina...

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