Inflation Expectations and Recovery from the Depression in the Spring of 1933: Evidence from the Narrative Record Andrew J. Jalil and Gisela Rua* January 2016 Abstract This paper uses the historical narrative record to determine whether inflation expectations shifted during the second quarter of 1933, precisely as the recovery from the Great Depression took hold. First, by examining the historical news record and the forecasts of contemporary business analysts, we show that inflation expectations increased dramatically. Second, using an event- studies approach, we identify the impact on financial markets of the key events that shifted inflation expectations. Third, we gather new evidence—both quantitative and narrative—that indicates that the shift in inflation expectations played a causal role in stimulating the recovery. JEL Classification: E31, E32, E12, N42 Keywords: inflation expectations, Great Depression, narrative evidence, liquidity trap, regime change * Andrew Jalil: Department of Economics, Occidental College, 1600 Campus Road, Los Angeles, CA 90041 (email:
[email protected]). Gisela Rua: Board of Governors of the Federal Reserve System, Mail Stop 82, 20th St. and Constitution Ave. NW, Washington, D.C. 20551 (email:
[email protected]). We are grateful to Pamfila Antipa, Alan Blinder, Michael Bryan, Chia-Ying Chang, Tracy Dennison, Barry Eichengreen, Joshua Hausman, Philip Hoffman, John Leahy, David Lopez-Salido, Christopher Meissner, Edward Nelson, Marty Olney, Jonathan Rose, Jean-Laurent Rosenthal, Jeremy Rudd, Eugene White, our discussants Carola Binder and Hugh Rockoff, and seminar participants at the Federal Reserve Board, the Federal Reserve Bank of San Francisco, the Reserve Bank of New Zealand, the California Institute of Technology, American University, and Occidental College for thoughtful comments.