Monetary policy and business cycles in the interwar years: The Scandinavian experience

Abstract

Evidence from newly constructed monthly indices of manufacturing production shows that differences between the Scandinavian countries regarding business cycles in the interwar years were closely related to monetary policy decisions. In the 1920s Sweden made an early return to gold, while Denmark and Norway experienced large fluctuations in nominal and real exchange rates before restoring the gold standard at the prewar parity in 1927–28. The differences in monetary policy were mirrored in the business cycle history; Denmark and Norway being alone in having a particularly severe contraction period in the years 1925–27, referred to as the gold-parity depression. The nominal depreciation of the effective exchange rates following the abandonment of the gold standard in September 1931 led to a significant real depreciation in all three countries. Econometric evidence confirms the view that the decision to leave gold was instrumental in dampening the contractionary business cycle impulses from abroad during the years of the Great Depression.