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Financial Market Shocks during the Great Depression

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Author Info

  • Chin Alycia

    ()
    (Board of Governors of the Federal Reserve System)

  • Warusawitharana Missaka

    ()
    (Board of Governors of the Federal Reserve System)

Abstract

This study examines the effect of shocks observed in financial markets on output and employment during the Great Depression. We present three main findings. First, an adverse financial shock leads to a decline in the manufacturing sector’s output and employment that peaks about 11 months afterward. Next, this shock has a much greater impact on the durables sector than the nondurables sector. Last, continuing financial market weakness in 1933 and 1934 may have restrained the recovery from the Great Depression. The findings suggest that financial market weakness contributed to the length and depth of the Great Depression, and that this occurred mainly through the investment channel. In addition, a counterfactual analysis using the estimates from the Great Depression suggests that the recent recession would have been less severe without the financial market disruptions in the fall of 2008.

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File URL: http://www.degruyter.com/view/j/bejm.2010.10.1/bejm.2010.10.1.2086/bejm.2010.10.1.2086.xml?format=INT
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Bibliographic Info

Article provided by De Gruyter in its journal The B.E. Journal of Macroeconomics.

Volume (Year): 10 (2010)
Issue (Month): 1 (September)
Pages: 1-27

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Handle: RePEc:bpj:bejmac:v:10:y:2010:i:1:n:25

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Web page: http://www.degruyter.com

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Cited by:
  1. James M Nason & Ellis Tallman, 2012. "Business cycles and financial crises: the roles of credit supply and demand shocks," Working Paper 1221, Federal Reserve Bank of Cleveland.
  2. Wagner, Helmut & Matanovic, Eva, 2012. "Volatility Impact of Stock Index Futures Trading - A Revised Analysis," MPRA Paper 51204, University Library of Munich, Germany.

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