The Price Level, Relative Prices and Economic Stability: Aspects of the Interwar Debate

43 Pages Posted: 20 Sep 2007

See all articles by David E. W. Laidler

David E. W. Laidler

University of Western Ontario - Department of Economics; CESifo (Center for Economic Studies and Ifo Institute)

Date Written: September 2003


Recent financial instability has called into question the sufficiency of low inflation as a goal for monetary policy. This paper discusses interwar literature bearing on this question. It begins with theories of the cycle based on the quantity theory, and their policy prescription of price stability supported by lender of last resort activities in the event of crises, arguing that their neglect of fluctuations in investment was a weakness. Other approaches are then taken up, particularly Austrian theory, which stressed the banking system's capacity to generate relative price distortions and forced saving. This theory was discredited by its association with nihilistic policy prescriptions during the Great Depression. Nevertheless, its core insights were worthwhile, and also played an important part in Robertson's more eclectic account of the cycle. The latter, however, yielded activist policy prescriptions of a sort that were discredited in the postwar period. Whether these now need re-examination, or whether a low-inflation regime, in which the authorities stand ready to resort to vigorous monetary expansion in the aftermath of asset market problems, is adequate to maintain economic stability is still an open question.

On 28-29 March 2003, the BIS held a conference on "Monetary stability, financial stability and the business cycle". This event brought together central bankers, academics and market participants to exchange views on this issue (see the conference programme and list of participants in this document). This paper was presented at the conference. Also included in this publication are the comments by the discussants. The views expressed are those of the author(s) and not those of the BIS. The opening speech at the conference by the BIS General Manager and the prepared remarks of the four participants on the policy panel are being published in a single volume in the BIS Papers series.

Suggested Citation

Laidler, David E. W., The Price Level, Relative Prices and Economic Stability: Aspects of the Interwar Debate (September 2003). BIS Working Paper No. 136, Available at SSRN: or

David E. W. Laidler (Contact Author)

University of Western Ontario - Department of Economics ( email )

London, Ontario N6A 5B8

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679

Do you want regular updates from SSRN on Twitter?

Paper statistics

Abstract Views
PlumX Metrics