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Overvalued: Swedish Monetary Policy in the 1930s


Rathke, Alexander; Straumann, Tobias; Woitek, Ulrich (2011). Overvalued: Swedish Monetary Policy in the 1930s. Working paper series / Department of Economics No. 58, University of Zurich.

Abstract

This paper reconsiders the role of monetary policy in Sweden’s strong recovery from the Great Depression. The Riksbank in the 1930s is sometimes seen as an example of a central bank that was relatively innovative in terms of the conduct of monetary policy. To consider this analytically, we estimate a small-scale, structural general equilibrium model of a small open economy using Bayesian methods. We find that the model captures the key dynamics of the period surprisingly well. Importantly, our findings suggest that Sweden avoided the worst excesses of the depression by conducting conservative rather than innovative monetary policy. We find that, by keeping the Swedish krona undervalued to replenish foreign reserves, Sweden’s exchange rate policy unintentionally contributed to the Swedish growth miracle of the 1930s, avoiding a major slump in 1932 and enabling the country to benefit quickly from the eventual recovery of world demand.

This paper reconsiders the role of monetary policy in Sweden’s strong recovery from the Great Depression. The Riksbank in the 1930s is sometimes seen as an example of a central bank that was relatively innovative in terms of the conduct of monetary policy. To consider this analytically, we estimate a small-scale, structural general equilibrium model of a small open economy using Bayesian methods. We find that the model captures the key dynamics of the period surprisingly well. Importantly, our findings suggest that Sweden avoided the worst excesses of the depression by conducting conservative rather than innovative monetary policy. We find that, by keeping the Swedish krona undervalued to replenish foreign reserves, Sweden’s exchange rate policy unintentionally contributed to the Swedish growth miracle of the 1930s, avoiding a major slump in 1932 and enabling the country to benefit quickly from the eventual recovery of world demand.

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Additional indexing

Item Type:Working Paper
Communities & Collections:03 Faculty of Economics > Department of Economics
Working Paper Series > Department of Economics
Dewey Decimal Classification:330 Economics
JEL Classification:C11, E58, F41, N14
Uncontrolled Keywords:Small open economy models, exchange rate policy, structural estimation, Bayesian analysis, Great Depression
Language:English
Date:December 2011
Deposited On:04 Jan 2012 15:33
Last Modified:05 Apr 2016 15:20
Series Name:Working paper series / Department of Economics
Number of Pages:36
ISSN:1664-7041 (P) 1664-705X (E)
Official URL:http://www.econ.uzh.ch/static/wp/econwp058.pdf
Related URLs:http://www.econ.uzh.ch/static/workingpapers.php
Permanent URL: https://doi.org/10.5167/uzh-54331

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