Research Technical Paper: Could a large scale asset purchase programme have mitigated the Great Depression?

A Research Technical Paper by Garo Garabedian and Rebecca Stuart studies the period between April and July 1932 during which the Federal Reserve (the Fed) actively purchased government securities. The paper considers what the effect would have been had the Federal Reserve more aggressively cut interest rates and extended its purchases over a longer period.

The key findings of the research are:

• The authors model the effect of a reduction in interest rates to, or near to, 0% (the zero lower bound) and a continuation of the average level of purchases for a further 12 months on a range of variables capturing prices, output and macro-financial linkages. The model used is Bayesian VARs.
• By cutting interest rates and maintaining the purchases of government securities for an extended period, the Fed could have significantly improved economic outcomes. Specifically, both prices and output would have returned to positive growth rates sooner than otherwise.
• However, asset purchases would have increased the supply of money substantially. This would have had a large impact on the exchange rate, most likely forcing the Unites States off the gold standard earlier than otherwise.

The views presented in Research Technical Papers are those of the authors alone and do not necessarily represent the official views of the Central Bank of Ireland.

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