A superb interview of Christina Romer on the topic.
She picks 5 books/paper to read on Great Depression:
- A Monetary History of the United States, 1867-1960 By Milton Friedman and Anna Schwartz (on how decline in aggregate demand was the main reason behind the crisis)
- Golden Fetters By Barry Eichengreen (on how the depression became internatuional event via the gold standard system)
- Essays on the Great Depression By Ben Bernanke (explaining the non-monetary factors for the depression i.e. how the collapse of banking system made the depression so prolonged)
- America’s Greatest Depression By Lester Chandler (gives details on policies framed during depression)
- The End of One Big Deflation by Peter Temin and Barry Wigmore (on how the event added – it was basically because of strong monetary response which ended the depression – quitting gold standard etc)
She was in a dilemma over whether to pick Friedman’s treatise or Keynes’ tome:
….Your first choice is A Monetary History of the United States by Milton Friedman and Anna Schwartz. Please give us a précis of the book and explain how it changed the debate about the causes of the Great Depression.
I frequently tell students: If you buy only one economics book, it should be A Monetary History. The book is obviously important for our understanding of the Great Depression, but its impact goes far beyond that. Friedman and Schwartz show us that monetary events and monetary policy have affected real output throughout American history.
That’s a fundamentally important finding. It tells us that a monetary development that affects aggregate demand has an impact on the things we care about, like employment, unemployment and how much we produce in the economy. The other thing that Friedman and Schwartz do is show us how to use historical evidence on policymakers’ motivation and thinking to help establish a causal relationship between money and output.
When you asked me for my list of books, I debated about whether to put The GeneralTheory by John Maynard Keynes on the list. The General Theory is an incredibly important book, but it’s basically a theoretical explanation of how aggregate demandcould affect output. It was Friedman and Schwartz who provided the empirical evidence that supported the theory. That’s why A Monetary History went to the top of my list.
With regard specifically to the Great Depression, Friedman and Schwartz show that there were large declines in the money supply associated with repeated waves of banking panics. They also provide compelling evidence that bad economic ideas and a dysfunctional organisational structure were key reasons why the Federal Reserve did so little to stop the panics.
She says one major reason why Friedman’s book is so good is that it uses a lot of non-statistical and descriptive data. And this is also the kind of research Romers have also speciailsed as well.
She says something which most econs will not agree to:
Milton Friedman believed deeply that monetary forces had an important impact on the economy, and he never missed an opportunity to remind people of that fact.
In the 1960s there was a fight between monetarists like Friedman and Schwartz, who thought that monetary forces were very important, and Keynesians like [Paul Anthony] Samuelson and Solow, who tended to focus on the impact of changes in government spending and taxes. Modern economists tend to see monetarists and Keynesians as being on the same side. They both believe, based on strong empirical evidence, that changes that affect the demand side of the economy – taxes, monetary changes or government purchases – affect output and employment.
Are you sure Dr. Romer?
I am fast forwarding to how Romer sees this crisis can end. She sass Fed needs a regime shift:
What we learned from the Temin and Wigmore paper is that one way out of a recession at the zero lower bound is by changing expectations. To do that, often what is needed is a very strong change in policy – something economists call a “regime shift”. The most effective way to shake an economy out of a terrible downturn when we’re at the zero lower bound is an aggressive change in policy that makes people wake up, say “this is a new day” and change their expectations. What the Fed has done since early 2009 is much more of an incremental change.
I think that what the Fed needs instead is a regime shift. A number of economists have suggested that the Fed adopt a new framework for monetary policy, like targeting a path for nominal GDP. If the Fed adopted such a nominal GDP target, they would start in some normal year before the crisis and say nominal GDP should have grown at a steady rate since then. Compared with that baseline, nominal GDP is dramatically lower today. Pledging to get back to the pre-crisis path for nominal GDP would commit the Fed to much more aggressive policy – perhaps more quantitative easing and deliberate actions to talk down the dollar. Such a strong change in the policy framework could have a dramatic effect on expectations, and hence on the behavior of consumers and businesses.
Fed recently became a defacto inflation targeter (not still a de jure targeter as Congress hasn’t passed required amendments to Fed Act) . So there has been a regime shift but is not seen as enough as the inflation target is a low 2%. Prof. Bernanke advocated a higher inflation target when central banks facing ZIRP but as Governor/Chairman realised it is not politically possible.
A superb interview. A nice primer on Great Depression economics…