Publication at Faculty of Social Sciences |
2009
Abstract
The present paper deals with monetary theories of the business cycle, illustrated on the example of the Great Depression. I show that the current macroeconomic consensus, drawing heavily from monetarism, largely overlooks the effect of monetary expansions on the interest rate, which is an essential intertemporal price in the economy.
Next, I argue that monetary expansions are not the cure for, but the cause of the business cycle, working through distortion of the interest rate. The 1920s, while generally known for price stability, are then shown to be a period of massive monetary inflation that laid the foundations for the subsequent Great Depression.