Did the Fed follow an implicit McCallum rule during the Great Depression?

Abstract

In this paper we address the issue of the consistency of the Fed action during the interwar period using a McCallum base money rule. Developing backward-looking models, forward-looking models and counterfactual historical simulation, we found that the McCallum rule provides interesting historical lessons to identify possible driving forces of its policy setting. We give evidence that over the period 1921–1933 the Fed followed an imperfect and partial McCallum rule, moving the money base instrument according to an output target but not correcting for the deviation from this target. Lastly, our outcomes highlight that during the Great Depression the Fed was probably more active than suggested in the literature.