The mistake of 1937: a general equilibrium anlaysis

This paper studies a dynamic general equilibrium model with sticky prices and rational expectations in an environment of low interest rates and deflationary pressures. We show that small changes in the public’s beliefs about the future inflation target of the government can lead to large swings in both inflation and output. This effect is much larger at low interest rates than under regular circumstances. This highlights the importance of effective communication policy at zero interest rates. We argue that confusing communications by the US Federal Reserve, the President of the United States, and key administration officials about future price objectives were responsible for the sharp recession in the US in 1937-38, one of the sharpest recessions in US economic history. Poor communication policy is the mistake of 1937. Before committing the mistake of 1937 the US policy makers faced economic conditions that are similar in some respect to those confronted by Japanese policy makers in the first half of 2006. JEL Classification: E32, E52, E6

Optimal Monetary Policy in a Liquidity Trap

We consider the consequences for monetary policy of the zero floor for nominal interest rates. The zero bound can be a significant constraint on the ability of a central bank to combat deflation. We show, in the context of an intertemporal equilibrium model, that open-market operations, even of unconventional' types, are ineffective if they do not change expectations about the future conduct of policy; in this sense, a liquidity trap' is possible. Nonetheless, a credible commitment to the right sort of history-dependent policy can largely mitigate the distortions created by the zero bound. In our model, optimal policy involves a commitment to adjust interest rates so as to achieve a time-varying price-level target, when this is consistent with the zero bound. We also discuss ways in which other central-bank actions, while irrelevant apart from their effects on expectations, may help to make credible a central bank's commitment to its target, and consider implications for the policy options currently available for overcoming deflation in Japan.

The Zero Bound on Interest Rates and Optimal Monetary Policy

This paper considers the consequences for monetary policy of the zero floor for nominal interest rates. The zero bound can be a significant constraint on the ability of a central bank to combat deflation. The paper shows, in the context of an intertemporal equilibrium model, that open-market operations, even of "unconventional" types, are ineffective if future policy is expected to be purely forward looking. However, a credible commitment to the right sort of history-dependent policy can largely mitigate the distortions created by the zero bound. In the model, optimal policy involves a commitment to adjust interest rates so as to achieve a time-varying price-level target, when this is consistent with the zero bound. The paper also discusses ways in which other central bank actions, although irrelevant apart from their effects on expectations, may help to make a central bank's commitment to its target more credible.macroeconomics, Zero Bound, Interest Rates, Optimal Monetary Policy

The Mistake of 1937: A General Equilibrium Analysis

This paper studies a dynamic stochastic general equilibrium model with sticky prices and rational expectations in an environment of low interest rates and deflationary pressures. We show that small changes in the publicfs beliefs about the future inflation target of the government can lead to large swings in both inflation and output. This effect is much larger at low interest rates than under regular circumstances. This highlights the importance of effective communication policy at zero interest rates. We argue that confusing communications by the U.S. Federal Reserve, the President of the United States, and key administration officials about future price objectives were responsible for the sharp recession in the United States in 1937?38, one of the sharpest recessions in U.S. economic history. Poor communication policy is the mistake of 1937. Before committing the mistake of 1937, the U.S. policymakers faced economic conditions that are similar in some respects to those confronted by Japanese policymakers in the first half of 2006.Deflation; Zero bound on interest rates; Regime changes; Great Depression

The Unbearable Lightness of A Useful Knowledge and Economic Growth

Economists usually sing with the same nose when they answer questions about the role of technology in economic growth. They generally agree that sustained long-term growth in productivity, which began in Western Europe some two centuries ago, could not have been maintained in an environment of stagnant production technologies. Whether we consult Karl Heinrich Marx, Joseph Alois Schumpeter or Robert Merton Solow, the answer is the same: new technologies are the source of long-term economic growth. Economists, as we know, usually argue that the production and utilization of new technologies depend critically on appropriate social institutions, such as competition, decentralized markets, secure property rights, enforceable contracts, and norms of trust and reciprocity. Yet virtually no one argues that long-term growth in output per worker is possible in an economy with stationary production techniques.Peer ReviewedRitrýnt tímari

Mackenzie River Driftwood: A Dendrochronological Study

As part of a general study of arctic driftwood, 206 samples of driftwood logs from the Mackenzie delta area were analyzed by dendrochronological methods (tree-ring studies). The aim was to detect the origin of the wood. Three forest stands in the delta were also sampled, and tree-ring chronologies were constructed. The Mackenzie driftwood can be divided into four groups: 1) driftwood originating from the upper Mackenzie delta with individual logs having up to 600 tree rings, 2) driftwood originating near the southern limit of the delta, 3) wood with relatively few tree rings with possible origin in the Liard River drainage area, and 4) driftwood samples not datable with any available chronologies. Three driftwood samples from the coast of Greenland could be correlated with tree-ring chronologies from the Mackenzie delta area and another three were correlated with chronologies from Alaska. American driftwood has not been detected in collections from Svalbard and Iceland, although more than 200 samples have been analyzed from each area.Key words: Mackenzie River, driftwod, dendrochronology, Arctic Ocean, East Greenland Current, surface currents, drift ice, Canada, AlaskaDans le cadre d'une étude générale du bois flotté dans l'Arctique, on a analysé 206 échantillons de billes de bois flotté provenant du delta du Mackenzie grâce à des méthodes dendrochronologiques (études des faisceaux de croissance de l'arbre). Le but était de déterminer l'origine du bois. On a aussi fait un échantillonnage de trois peuplements de forêts dans le delta et on en a établi la chronologie des faisceaux de croissance. On peut diviser le bois flotté du Mackenzie en quatre groupes: 1) le bois provenant de la partie amont du delta du Mackenzie, avec des billes possédant chacune jusqu'à 600 cernes concentriques, 2) le bois flotté provenant de la limite méridionale du delta, 3) le bois ayant relativement peu de cernes, provenant peut-être du bassin hydrographique de la rivière au Liard, et 4) des échantillons de bois flotté pour la datation desquels aucune chronologie n'était disponible. On a pu corréler par dendrochronologie trois échantillons de bois flotté provenant de la côte du Groenland avec des échantillons provenant de la région du delta du Mackenzie, et trois autres avec des échantillons provenant de l'Alaska. Dans des collections provenant du Svalbard et d'Islande, on n'a pas détecté de bois flotté américain, bien qu'on ait analysé plus de 200 échantillons de chaque région. Cela révèle qu'une petite quantité de bois flotté américain est transporté de la mer de Beaufort et de la mer de Béring jusqu'à l'océan Atlantique nord, probablement par la partie occidentale du courant est-groenlandais. Ce bois est déposé sur la côte du Groenland. Le bois flotté américain n'atteint probablement pas les îles du centre et de l'est de l'Atlantique nord.Mots clés : fleuve Mackenzie, bois flotté, dendrochronologie, océan Arctique, courant est-groenlandais, courant de surface, glace de dérive, Canada, Alask