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DID THE FED RESPOND TO LIQUIDITY SHORTAGE EPISODES DURING THE GREAT DEPRESSION?

Published online by Cambridge University Press:  09 January 2018

Olivier Damette  and
Antoine Parent
Olivier Damette
Affiliation:
University of Lorraine
Antoine Parent*
Affiliation:
Sciences Po-Lyon
*
Address correspondence to: Antoine Parent, Sciences Po-Lyon, 14 Avenue Berthelot, 69365 LYON Cedex 07, France; e-mail: antoine.parent@sciencespo-lyon.fr.
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Abstract

The October 1929 crash led to a complete freeze of New York open markets. Studying the Fed monetary policy conduct in a nonlinear framework, using credit spreads between open market rates and the Fed's instrument rates as a proxy for liquidity risk, we present econometric evidence that the Fed was well aware of such risks as early as 1930, reacted to the financial stress and altered its monetary policy in consequence. Our outcomes revisit conventional wisdom about the presumed passivity of the Fed throughout the 30s.

Keywords

Crisis of 1929Monetary PolicyMonetary CliometricsCentral BanksNonlinear STR Models
Type
Articles
Information
Macroeconomic Dynamics , Volume 22 , Special Issue 7: Recent Insights into Financial, Housing, and Monetary Markets , October 2018 , pp. 1727 - 1749
Copyright
Copyright © Cambridge University Press 2018 

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Footnotes

We wish to thank the participants of the IXXI Seminar (Complex Systems Institute) on “Times Series and Forecasting in Social Sciences,” Ecole Normale Supérieure de Lyon, January 17, 2014, the participants of the session “Microstructure of financial markets” of the Asian Finance Annual Conference, Bali June 24–27, 2014, and most notably Richard Roll for his helpful comments, the participants to the session Nonlinear Dynamics of the 2nd international workshop on “Financial Markets and Nonlinear Dynamics” (FMND 2015), Paris, June 4 and 5, 2015, especially Junsoo Lee, Timo Teräsvirta, Ruey Tsay, and Remzi Uctum and to the participants of the GDRE Money Banking and Finance Research Group, Nice, 11 and 12 June, 2015 and most notably to Jean-Bernard Chatelain, Cécile Bastidon, and Efrem Castelnuovo. We are especially grateful to Pete Ferderer, David Wheelock, Lucio Sarno, Christopher Meissner, and Price Fishback, for very precious advice on former versions of this paper. Our special acknowledgements go to Peter Temin for his patient reading, thorough analysis and suggestions. All remaining errors and inadequacies are our own.

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