Saturday, November 29, 2008

Paul Krugman Versus Christina Romer

Paul Krugman is questioning whether the Great Depression was truly a monetary phenomenon. He apparently missed Christina Romer's article "What Ended the Great Depression?" where she shows that monetary developments were key not only to the economic recovery of 1933-1936 but also for the post-1938 recovery. These developments were what I would call unconventional monetary policy: FDR's devaluing gold, gold inflows from abroad, and Treasury choosing not to sterilize them. See here for more discussion of her findings--including a striking figure that shows what would have happened had there not been these monetary developments--and how it raises questions for the World War II-ended-the-Great-Depression story.

Update: See Josh's comments below and Zubin Jelveh's take on the numbers.


  1. I found Krugman's post to be particularly aggravating. It is not sufficient to look at the monetary base in and of itself and make any credible statements about whether the Fed was acting sufficiently or not. When analyzing monetary (dis)equilibrium we must look at both supply and demand. Your recent discussion of the money multiplier is extremely prescient in this respect. Are we to believe that the money multiplier of the monetary base was not collapsing in the wake of banking failures and increasing reserve ratios thereby offsetting or overwhelming the modest increases in base money?

    I think that anyone who has read the work of Christina Romer and Friedman and Schwartz would conclude that their work remains credible under close scrutiny.

  2. Great point on looking at money supply and money demand.

  3. Josh: Your comment makes no sense. Krugman's whole body of work is based on looking at both supply and demand. That's his whole point. Increasing the money supply doesn't work in a liquidity trap because demand for money drops. Hence you need to look at fiscal policy.