UC Berkeley

The Making of a Monetary Union: Evidence from the U.S. Discount Market 1914-1935

The decentralized structure of the Federal Reserve gave regional Reserve banks a large degree of autonomy in setting discount rates. This created repeated and continued periods of non-uniform discount rates across the 12 Federal Reserve districts. Commercial banks did not take full advantage of these differentials, reflecting the effectiveness of qualitative restrictions on the use of discount window liquidity in limiting the geographical movement of funds. While the choice of regional autonomy over complete financial integration was reasonable given the characteristics of the U.S. monetary union in the interwar period, the Federal Reserve failed to use this autonomy to stabilize regional economic activity relative to the national average. The diagnosis that the costs of decentralization outweighed the gains from regional differentiation motivated reforms that standardized and centralized control of Reserve bank discount policies.

Supply-Side Policies in the Depression: Evidence from France

The effects of supply-side policies in depressed economies are controversial. We shed light on this debate using evidence from France in the 1930s. In 1936, France departed from the gold standard and implemented mandatory wage increases and hours restrictions. Deflation ended but output stagnated. We present time-series and cross-sectional evidence that these supply-side policies, in particular the 40-hour law, contributed to French stagflation. These results are inconsistent both with the standard one-sector new Keynesian model and with a medium scale, multi-sector model calibrated to match our cross-sectional estimates. We conclude that the new Keynesian model is a poor guide to the effects of supply-side shocks in depressed economies.

Fiscal Policy in the Depression: Evidence from Digging Holes and Filling Them

I use historical data on military spending on a strategic defense system - the Maginot Line - during the interwar period in France to estimate the effect of fiscal policy in a depressed economy. Planning for the construction of the defense system took place in the 1920s, while actual spending mostly occurred in the 1930s. Factors such as the natural local terrain, and the location of military threat generated variations in spending across space and time that were not related to current or expected levels of economic activity in these areas. I exploit these variations to estimate a local government spending multiplier that controls for aggregate shocks and aggregate policy, such as changes in distortionary taxes and aggregate monetary policy. I find a local multiplier of 1. Given the likely bias introduced by the use of fiscal data to proxy local economic activity and by the \textit{ad-hoc} assumptions made to reconstruct a precise geographical allocation of border fortification spending, I see my result as evidence that the true local government spending multiplier is at least equal to 1.