Academic journal article Economic Inquiry

Anticipated Money, Unanticipated Money, and Output: 1873-1930

Academic journal article Economic Inquiry

Anticipated Money, Unanticipated Money, and Output: 1873-1930

Article excerpt



This paper examines the roles of anticipated and unanticipated money in the period between the Civil War and the Depression.(1) Such an examination is warranted for at least two reasons. First, estimation of the impact of anticipated and unanticipated money on output for historical periods can enhance our understanding of the responses of economic activity to these key variables.(2) Second, recent work has shown that traditional historical estimates of output may be faulty; see Romer [1986a; 1986b; 1986c; 1988]. Not only do most studies investigating the economic roles played by anticipated and unanticipated money concentrate on the post-World War II era, those that discuss the period before World War II, such as Rush [1985; 1986], use traditional data. Indeed, despite the interesting analyses by Rush, if the validity of the conventional data on output and unemployment for the era under consideration is rejected, then virtually no results on the importance of monetary and real factors for economic activity are available for this important period. Thus, further discussion of this topic is needed to answer two important questions: What do the revised data show us about the historical economy? Do these revisions change the inferences drawn about monetary influences on economic activity?

The analysis presented here is comprehensive in that a wide range of output measures are employed, both in terms of the types of output and in terms of the manner in which the output measures are constructed. Given this variety in the output measures, consistent results on the effects of anticipated and unanticipated money across output measures indicate that conclusions drawn from the analysis are robust. In particular, the empirical results presented below support the following hypotheses: (i) that anticipated M2 and monetary base growth have no effect on output, regardless of the output measure used; (ii) that unanticipated M2 and monetary base growth do effect output, regardless of the output measure used; and (iii) that changes in financial intermediation may be important for the evolution of output over time. Support for hypotheses (i) and (ii) is consistent with the "monetary" explanation of business cycles. Support for hypotheses (iii) may be consistent with "real" explanations of business cycles if exogenous shocks to the monetary production technology subsequently affect output.(3) Taken together, the joint support for hypotheses (i) - (iii) suggests that, at a minimum, neither the real nor the monetary explanations for historical U.S. business cycles can be discounted without additional work.

The remainder of the paper is organized as follows. Section II presents a brief overview of the historical period under consideration, along with a discussion of prior work on the effects of anticipated and unanticipated money on output determination during this time period. Section III discusses the data and the methodology. The empirical results are presented in section IV and the conclusions in section V.


The Historical Period

The period under investigation, 1873-1930, is one of substantial economic change. Banking panics, the return to the gold standard, the founding of the Federal Reserve System, and World War I are some of the more important events occuring during this period. We consider the role played by expected and unexpected money in output determination for several major subperiods. While data availability largely determined the selection of these subperiods, they generally correspond to major economic events.

Despite the structural and institutional changes over the period, we also examine the roles of anticipated and unticipated money growth in the determination of output over the entire time period. To be valid, tests of the impact of money growth on output require a reasonable degree of homogeneity in the economic environment. …

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