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This is the classic account by friedman and schwartz

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Unformatted text preview: rough some combination of lower economic activity and deflation. This is the classic account by Friedman and Schwartz (1963) of how the widespread bank failures in the United States States deepened the Great Depression. However, However, such a model, at least as conventionally elaborated, cannot explain why why the recent problems of the financial sector should have caused a sharp recession, sion, for the Friedman–Schwartz story depends on the monetary base remaining fixed despite a collapse of the money multiplier. But under contemporary instixed tutional tutional arrangements, the Fed automatically adjusts the supply of base money as necessary to maintain its target for the federal funds interest rate; thus, any change in the money multiplier due to a banking crisis should automatically be offset by a corresponding increase in the monetary base, neutralizing any effect on interest rates, rates, inflation, or output.1 Moreover, Moreover, many of the institutions whose failure or near-failure appeared to do the most damage in the recent crisis, such as Lehman Brothers, did not issue liabilities that would c...
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This note was uploaded on 11/23/2013 for the course ECON 11837649 taught by Professor Batchelder during the Spring '10 term at Pepperdine.

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