In the following study the researcher attempt to analyze whether the monetary policy adopted by the Federal Reserve during the interwar period led to the Great Depression. The study would investigate through an extensive literature review by studying the perspectives of renowned economists in this genre. The researcher will base the analysis on the Friedman and Schwartz, and Temin model which are considered to be the most effective theoretical framework in the history of Great Depression studies.
[...] The specified the decrease in output on the other hand had been due to the system of manufacturing prevalent at the time that restricted production such as building permits, shipments of machines and price indexes of metal products accounted for the stagnant liquid money which froze in the midst of regulations. Temin also looked at the consumption side of the Great Depression aspects. He followed the Keynesian model that report that due to the failure of demand people stopped buying goods. [...]
[...] Temins critically examined consumption behavior during that period and hypothesize that the low liquid supply of money during the Depression had been the result of lack of consumption or demand. Since there was no spending or low spending money also subsequently decreased. The banks and the monetary policy in actuality did not have the catalytic effect on the money supply. Both of these views are contradictory and controversial. According to this researcher, both the views are valid in their own respective stance. [...]
[...] According to a study by Albrecht Ritschl and Ulrich Woitek (2000) following Temin's hypothesis that the economic recession of the US during the Great Depression could not have been curtailed through predictive monetary policy, Ritschl and Woitek used a quantitative predictive model and attempt to relate the impact of interest rate and monetary policies on the money supply separately. They found that: In neither case, a depression of any sizeable magnitude would have occurred. The forecast from September 1929 does predict a mini recession for early 1930, but nothing similar to the downward spiral that actually occurred. [...]
[...] From their study on the Great Depression the authors provided the evidence that the period of the Great Depression, characterized by collapsing asset prices and decline in general price level, the effect of debt deflation had been difficult to gauge as they do today. The problem of relegating the monetary policies for output, wages, profitability and prices could not have been possible especially in a country strived with news of war. And as a result the government could not mediate the impact of the crises. [...]
[...] Similarly, during the Depression of the 1930s the banking panics identified by Bernanke and James (1991) follow on the heels of the collapse of equity prices and a dramatic decline in the world price level." They also noted that the underlying shocks that connect the bank failures with panics formed a catalytic effect on the debt deflation which eroded the collateral against bank lending. They brought forward the theoretical framework that was responsible for the bank failures. They write (Eichengreen and Grossman 1994): Investigations of debt deflation are similarly handicapped by difficulties of defining and measuring the concept. [...]
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