This study of output data for the periods 1866-1914 and 1947-82 shows that much of the apparent stabilization of the postwar economy is an artifact of the way the historical data are constructed. When the methods used to form the historical index of industrial production are replicated for the postwar era, the consistent data show less than half the stabilization apparent in modern data. The excess volatility of thehistorical data is due to the overrepresentation of materials and intermediate goods in the early indexes of total industrial production.

There is a tendency to think of official government statistics as unambiguous measures of economic activity. In truth, however, nearly all of the available series are based heavily on assumptions, and are sensitive to the estimation techniques used. Furthermore, many of these assumptions and estimation techniques have been refined and improved over time. Whether these underlying assumptions are reasonable and whether the refinement of assumptions over time has been useful depends crucially on the questions one is trying to answer. For example, an estimate of consumption derived from data on retail sales may be perfectly adequate for planning future production, or setting government budgets, but may be disastrous for testing a subtle economic theory. Similarly, gathering more genuine consumption data might improve our current estimates of consumption, but a series that reflects retail sales for one era and genuine consumption for another could wreak havoc when used in estimating a time-series rela

The narrative approach to macroeconomic identification uses qualitative sources, such as newspapers or government records, to provide information that can help establish causal relationships. This paper discusses the requirements for rigorous narrative analysis using fresh research on the impact of monetary policy as the focal application. We read the historical Minutes and Transcripts of Federal Reserve policymaking meetings to identify significant contractionary and expansionary changes in monetary policy not taken in response to current or prospective developments in real activity for the period 1946 to 2016. We find that such monetary shocks have large and significant effects on unemployment, output, and inflation in the expected directions. Analysis of available policy records suggests that a contractionary monetary shock likely occurred in 2022. Based on the empirical estimates of the effect of previous shocks, one would expect substantial negative impacts on real GDP and inflation in 2023 and 2024.

This paper examines the aftermath of postwar financial crises in advanced countries. We construct a new semiannual series on financial distress in 24 OECD countries for the period 1967–2012. The series is based on assessments of the health of countries' financial systems from a consistent, real-time narrative source, and classifies financial distress on a relatively fine scale. We find that the average decline in output following a financial crisis is statistically significant and persistent, but only moderate in size. More important, we find that the average decline is sensitive to the specification and sample, and that the aftermath of crises is highly variable across major episodes. A simple forecasting exercise suggests that one important driver of the variation is the severity and persistence of financial distress itself. At the same time, we find little evidence of nonlinearities in the relationship between financial distress and the aftermaths of crises.

This paper examines the missing transmission mechanism in Friedman's and Schwartz's monetary explanation of the Great Depression. We review the challenge provided by the decline in nominal interest rates in the early 1930s, and show that the monetary explanation requires not just that there were expectations of deflation, but that they were caused by monetary contraction. Using a detailed analysis of Business Week magazine, we find evidence that monetary contraction and Federal Reserve policy contributed to expectations of deflation during the downturn. This suggests that monetary shocks may have depressed spending and output in part by raising real interest rates.

Monetary policy-makers' beliefs about how the economy functions are a key determinant of the conduct of policy. That monetary policy has little impact under the prevailing circumstances is a belief which has resurfaced periodically over the Federal Reserve's 100-year history. In both the 1930s and the 1970s a belief in the ineffectiveness of monetary policy led to policy inaction and poor economic outcomes. For some of the recent period, the same view appears to have limited the policy response to prolonged high unemployment in the presence of low inflation.

This paper investigates the impact of tax changes on economic activity. We use the narrative record, such as presidential speeches and Congressional reports, to identify the size, timing, and principal motivation for all major postwar tax policy actions. This analysis allows us to separate legislated changes into those taken for reasons related to prospective economic conditions and those taken for more exogenous reasons. The behavior of output following these more exogenous changes indicates that tax increases are highly contractionary. The effects are strongly significant, highly robust, and much larger than those obtained using broader measures of tax changes.

A key issue in monetary policymaking is the appropriate division of labor between the profes? sional staff of the central bank and the appointed policymakers. Lars E. O. Svensson (1999) argues that the appropriate role of a policymaking group, such as the Federal Open Market Com? mittee (FOMC) in the United States, is to make judgments about social welfare, taking as given the likely outcomes of different policies as esti? mated by the staff. In this division, the staff is relied upon to assess current and prospective economic conditions and to forecast the effects of different policies. Policymakers' only role is to decide which of the various options should be chosen.