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The Great Demand Depression

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  • Weder, Mark

Abstract

This Paper entertains the notion that disturbances on the demand side play a central role in our understanding of the Great Depression. In fact, from Euler equation residuals I am able to identify a series of unusually large negative demand shocks that appeared to have hit the US economy during the 1930s. I apply these measured demand shocks to a dynamic general equilibrium model and find that size and sequence of shocks can generate a pattern of the model economy that is not unlike data. The model is able to account for the lion’s share of the decline in economic activity and is able to exaggerate realistic persistence.

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Bibliographic Info

Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 3067.

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Date of creation: Nov 2001
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Handle: RePEc:cpr:ceprdp:3067

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Keywords: demand shocks; dynamic general equilibrium; great depression;

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  1. Marianne Baxter & Robert G. King, 1991. "Productive externalities and business cycles," Discussion Paper / Institute for Empirical Macroeconomics 53, Federal Reserve Bank of Minneapolis.
  2. Edward C. Prescott, 1986. "Theory ahead of business cycle measurement," Staff Report 102, Federal Reserve Bank of Minneapolis.
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  4. Benhabib, Jess & Wen, Yi, 2004. "Indeterminacy, aggregate demand, and the real business cycle," Journal of Monetary Economics, Elsevier, vol. 51(3), pages 503-530, April.
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  8. Harold L. Cole & Lee E. Ohanian, 2004. "New Deal Policies and the Persistence of the Great Depression: A General Equilibrium Analysis," Journal of Political Economy, University of Chicago Press, vol. 112(4), pages 779-816, August.
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  11. Harrison, Sharon G. & Weder, Mark, 2006. "Did sunspot forces cause the Great Depression?," Journal of Monetary Economics, Elsevier, vol. 53(7), pages 1327-1339, October.
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  17. Greenwood, Jeremy & Hercowitz, Zvi & Huffman, Gregory W, 1988. "Investment, Capacity Utilization, and the Real Business Cycle," American Economic Review, American Economic Association, vol. 78(3), pages 402-17, June.
  18. Christopher J. Erceg & Michael D. Bordo & Charles L. Evans, 2000. "Money, Sticky Wages, and the Great Depression," American Economic Review, American Economic Association, vol. 90(5), pages 1447-1463, December.
  19. Hall, Robert E, 1997. "Macroeconomic Fluctuations and the Allocation of Time," Journal of Labor Economics, University of Chicago Press, vol. 15(1), pages S223-50, January.
  20. Barry Eichengreen & Peter Temin, 1997. "The Gold Standard and the Great Depression," NBER Working Papers 6060, National Bureau of Economic Research, Inc.
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Citations

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Cited by:
  1. Mark Weder, 2004. "The Role of Preference Shocks and Capital Utilization in the Great Depression," CDMA Working Paper Series 200405, Centre for Dynamic Macroeconomic Analysis.
  2. Luca, PENSIEROSO, 2005. "Real Business Cycle Models of the Great Depression : a Critical Survey," Discussion Papers (ECON - Département des Sciences Economiques) 2005005, Université catholique de Louvain, Département des Sciences Economiques.
  3. Wen, Yi, 2007. "By force of demand: Explaining international comovements," Journal of Economic Dynamics and Control, Elsevier, vol. 31(1), pages 1-23, January.
  4. Wen, Yi, 2006. "Demand shocks and economic fluctuations," Economics Letters, Elsevier, vol. 90(3), pages 378-383, March.
  5. Weder, Mark, 2003. "Some Observations on the Great Depression in Germany," CEPR Discussion Papers 3716, C.E.P.R. Discussion Papers.
  6. Yi Wen, 2005. "By force of demand: explaining international comovements and the saving-investment correlation puzzle," Working Papers 2005-043, Federal Reserve Bank of St. Louis.

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