Chronicles of a Deflation Unforetold

Francois R. Velde
2006 Social Science Research Network  
Suppose the nominal money supply could be cut literally overnight by, say, %. What would happen to prices, wages, output? The answer can be found in s France, where just such an experiment was carried out, repeatedly. Prices adjusted instantaneously and fully on one market only, that for foreign exchange. Prices on other markets (such as commodities) as well as prices of manufactured goods and industrial wages fell slowly, over many months, and not by the full amount of the nominal
more » ... on. Coincidentally or not, the industrial sector (as represented by manufacturing of woolen cloths) experienced a contraction of %. When the government changed course and increased the nominal money supply overnight by %, prices responded much more, and the woolen industry rebounded.
doi:10.2139/ssrn.949177 fatcat:rwiewspaczebbhpdbwpa4jxvfu