Journal of Economics and Economic Education Research (Print ISSN: 1533-3590; Online ISSN: 1533-3604)

Abstract

The Great Depression: An Useful Case Study to Understand the Concepts of Deflationary Spiral and Unconventional Monetary Policy

Author(s): Mauro Visaggio

The US business cycle in period 1929-1936 is characterized by the Great Depression. This paper aims, through the analysis of this case of study, to clarify two relevant macroeconomic concepts: deflationary spiral process and unconventional monetary policy. On the one hand, the bursting of the speculative bubble on the stock market, and then the banking system crisis, produce a collapse in the growth rate of the GDP. In front of a neutral fiscal policy and a monetary policy aimed at defending the fixed exchange rate, the non-functioning of the perfect adjustment mechanism of the money wage implies a deflationary spiral so that the recession phase extends from 1929 to 1932. On the other hand, the economic recovery begins in 1933. While the fiscal policy is substantially neutral vice versa, the expansive monetary policy implemented after the abandonment of the fixed exchange rate regime is the decisive key which allows the economy of the USA to emerge from the great depression: the ultra-expansionary monetary policy, even in the presence of a liquidity trap, manages through the phenomenon of reflation to reduce the real interest rate and encourage an increase in private investment. In certain sense, it can be concluded that the monetary policy implemented starting from 1933 is the forerunner of the unconventional monetary policies (i.e., quantitative easing monetary policy) implemented in the first two decades of the present century in various western countries

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