Key Findings
Impact on Unemployment
A one percentage point monetary tightening led to a 0.9 percentage point increase in unemployment during the classical gold standard period
Effect on Inflation
A one percentage point monetary tightening caused inflation to fall by 3.1 percentage points
Source of Economic Volatility
Monetary policy shocks accounted for approximately one-third of macroeconomic volatility in both unemployment and inflation
Bank Rate Response Function
- Shows key determinants of Bank Rate changes based on the Bank's reaction function
- Exchange rates had the largest positive impact on Bank Rate decisions
- Initial Bank Rate level and reserves (bullion/proportion) had negative effects
Impact of Monetary Policy Shock
- Shows the response of unemployment and inflation over 36 months after a monetary policy shock
- Peak unemployment effect of 0.95 percentage points reached after 18 months
- Maximum inflation decline of 3.08 percentage points occurred after 15 months
Transmission Mechanisms
- Based on survey responses from The Economist (1907) on effects of monetary tightening
- Raw material prices and consumption expectations were the main transmission channels
- Shows multiple channels through which monetary policy affected the real economy
Contribution and Implications
- First study to apply narrative approach to monetary policy during classical gold standard period
- Resolves the "price puzzle" found in previous studies of historical monetary policy
- Demonstrates that monetary policy had substantial effects even under the gold standard regime
Data Sources
- Bank Rate response function chart based on Table 1 regression coefficients
- Impact chart constructed from baseline VAR results shown in Figure 4
- Transmission mechanisms chart based on survey response data in Table 3