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By Scott B Sumner
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Extra info for The Midas Paradox: Financial Markets, Government Policy Shocks, and the Great Depression
Chapter 13 If one defines real wages as the ratio of nominal wages to wholesale prices, then high frequency fluctuations in real wages during the 1930s were tightly correlated with movements in industrial production. Understanding real wage cyclicality is the key to understanding the Great Depression. This requires separate analysis of nominal wage and price level shocks. New Deal legislation led to five separate nominal wage shocks, which repeatedly aborted promising economic recoveries. The gold market approach can help us understand price-level volatility between October 1929 and March 1933, and, surprisingly, is even more useful during the first five years after the United States departed from the gold standard.
There is no way that I can respond to this concern on a purely theoretical level. In a sense, the long narrative at the center of this book represents both an analysis of the Great Depression and a defense of my method. Nevertheless, it will be useful if we first examine a few of the practical problems associated with the use of event studies. Clinton Greene (2000) refutes some common misconceptions about “data mining,” calling it a necessary and inevitable part of the process of formulating theoretical models.
If interest rates and commodity prices were determined internationally via arbitrage, in what sense could a country be said to have an independent monetary policy? Ultimately, I decided that the gold reserve ratio was the most sensible way of thinking about the stance of monetary policy under a gold standard. When I worked out the numbers, I was surprised to find that world monetary policy tightened sharply between October 1929 and October 1930, a policy shift that had been missed by previous researchers.