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Re-Examining the Contributions of Money and Banking Shocks to the U.S. Great Depression

In: NBER Macroeconomics Annual 2000, Volume 15

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  • Harold L. Cole
  • Lee E. Ohanian

Abstract

This paper quantitatively evaluates the hypothesis that deflation can account for much of the Great Depression (1929–33). We examine two popular explanations of the Depression: (1) The “high wage” story, according to which deflation, combined with imperfectly flexible wages, raised real wages and reduced employment and output. (2) The “bank failure” story, according to which deflationary money shocks contributed to bank failures and to a reduction in the efficiency of financial intermediation, which in turn reduced lending and output. We evaluate these stories using general equilibrium business cycle models, and find that wage shocks and banking shocks account for a small fraction of the Great Depression. We also find that some other predictions of the theories are at variance with the data.

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This chapter was published in:

  • Ben S. Bernanke & Kenneth Rogoff, 2001. "NBER Macroeconomics Annual 2000, Volume 15," NBER Books, National Bureau of Economic Research, Inc, number bern01-1, July.
    This item is provided by National Bureau of Economic Research, Inc in its series NBER Chapters with number 11057.

    Handle: RePEc:nbr:nberch:11057

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    1. Christopher J. Erceg & Michael D. Bordo & Charles L. Evans, 2000. "Money, Sticky Wages, and the Great Depression," American Economic Review, American Economic Association, American Economic Association, vol. 90(5), pages 1447-1463, December.
    2. Bernanke, Ben S. & Gertler, Mark & Gilchrist, Simon, 1999. "The financial accelerator in a quantitative business cycle framework," Handbook of Macroeconomics, Elsevier, in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 21, pages 1341-1393 Elsevier.
    3. Nathan Balke & Robert J. Gordon, 1986. "Appendix B Historical Data," NBER Chapters, National Bureau of Economic Research, Inc, in: The American Business Cycle: Continuity and Change, pages 781-850 National Bureau of Economic Research, Inc.
    4. Bernanke, Ben S & Carey, Kevin, 1996. "Nominal Wage Stickiness and Aggregate Supply in the Great Depression," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 111(3), pages 853-83, August.
    5. Harold L. Cole & Lee E. Ohanian, 1999. "The Great Depression in the United States from a neoclassical perspective," Quarterly Review, Federal Reserve Bank of Minneapolis, Federal Reserve Bank of Minneapolis, issue Win, pages 2-24.
    6. Christina D. Romer, 1993. "The Nation in Depression," Journal of Economic Perspectives, American Economic Association, American Economic Association, vol. 7(2), pages 19-39, Spring.
    7. Hamilton, James D, 1992. "Was the Deflation during the Great Depression Anticipated? Evidence from the Commodity Futures Market," American Economic Review, American Economic Association, American Economic Association, vol. 82(1), pages 157-78, March.
    8. Bernanke, Ben S, 1983. "Nonmonetary Effects of the Financial Crisis in Propagation of the Great Depression," American Economic Review, American Economic Association, American Economic Association, vol. 73(3), pages 257-76, June.
    9. Bernanke, Ben S & Parkinson, Martin L, 1991. "Procyclical Labor Productivity and Competing Theories of the Business Cycle: Some Evidence from Interwar U.S. Manufacturing Industries," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 99(3), pages 439-59, June.
    10. Peter Temin, 1991. "Lessons from the Great Depression," MIT Press Books, The MIT Press, The MIT Press, edition 1, volume 1, number 0262700441, December.
    11. Romer, Christina D., 1988. "World War I and the postwar depression A reinterpretation based on alternative estimates of GNP," Journal of Monetary Economics, Elsevier, Elsevier, vol. 22(1), pages 91-115, July.
    12. Robert P. Lamont, 1930. "The White House Conferences," The Journal of Business, University of Chicago Press, University of Chicago Press, vol. 3, pages 269.
    13. O'Brien, Anthony Patrick, 1989. "A Behavioral Explanation for Nominal Wage Rigidity during the Great Depression," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 104(4), pages 719-35, November.
    14. Lucas, Robert E, Jr & Rapping, Leonard A, 1972. "Unemployment in the Great Depression: Is There a Full Explanation?," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 80(1), pages 186-91, Jan.-Feb..
    15. Harold L. Cole & Lee E. Ohanian, 2001. "New Deal policies and the persistence of the Great Depression: a general equilibrium analysis," Working Papers, Federal Reserve Bank of Minneapolis 597, Federal Reserve Bank of Minneapolis.
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    1. A multi-sectoral approach to the U.S. Great Depression
      by Christian Zimmermann in NEP-DGE blog on 2010-02-08 01:58:23
    2. 2008=1929?
      by Economic Logician in Economic Logic on 2008-03-24 11:15:00
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