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Re-examining the contributions of money and banking shocks to the U.S. Great Depression

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Author Info
Harold L. Cole
Lee E. Ohanian

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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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Paper provided by Federal Reserve Bank of Minneapolis in its series Staff Report with number 270.

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Date of creation: 2000
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Handle: RePEc:fip:fedmsr:270

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Keywords: Monetary policy ; Depressions ; Deflation (Finance) ; Banks and banking;

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Robert P. Lamont, 1930. "The White House Conferences," Journal of Business, University of Chicago Press, vol. 3, pages 269. [Downloadable!]
  2. Michael D. Bordo & Christopher J. Erceg & Charles L. Evans, 1997. "Money, sticky wages, and the Great Depression," Working Paper Series, Macroeconomic Issues WP-97-02, Federal Reserve Bank of Chicago. [Downloadable!]
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  3. Bernanke, B. & Gertler, M. & Gilchrist, S., 1998. "The Financial Accelerator in a Quantitative Business Cycle Framework," Working Papers 98-03, C.V. Starr Center for Applied Economics, New York University. [Downloadable!]
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  4. Kiyotaki, Nobuhiro & Moore, John, 1997. "Credit Cycles," Journal of Political Economy, University of Chicago Press, vol. 105(2), pages 211-48, April.
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  5. Bernanke, Ben S & Carey, Kevin, 1996. "Nominal Wage Stickiness and Aggregate Supply in the Great Depression," The Quarterly Journal of Economics, MIT Press, vol. 111(3), pages 853-83, August. [Downloadable!] (restricted)
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  6. Nathan Balke & Robert J. Gordon, 1986. "Appendix B Historical Data," NBER Chapters, in: The American Business Cycle: Continuity and Change, pages 781-850 National Bureau of Economic Research, Inc. [Downloadable!]
  7. 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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  8. Hamilton, James D, 1992. "Was the Deflation during the Great Depression Anticipated? Evidence from the Commodity Futures Market," American Economic Review, American Economic Association, vol. 82(1), pages 157-78, March. [Downloadable!] (restricted)
  9. Romer, Christina D, 1993. "The Nation in Depression," Journal of Economic Perspectives, American Economic Association, vol. 7(2), pages 19-39, Spring. [Downloadable!] (restricted)
  10. Bernanke, Ben S, 1983. "Nonmonetary Effects of the Financial Crisis in Propagation of the Great Depression," American Economic Review, American Economic Association, vol. 73(3), pages 257-76, June. [Downloadable!] (restricted)
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  11. 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, issue Win, pages 2-24. [Downloadable!]
  12. 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, vol. 99(3), pages 439-59, June. [Downloadable!] (restricted)
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  13. 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, vol. 80(1), pages 186-91, Jan.-Feb.. [Downloadable!] (restricted)
  14. O'Brien, Anthony Patrick, 1989. "A Behavioral Explanation for Nominal Wage Rigidity during the Great Depression," The Quarterly Journal of Economics, MIT Press, vol. 104(4), pages 719-35, November. [Downloadable!] (restricted)
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(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Andrés Felipe Arias, 2000. "The Colombian Banking Crisis: Macroeconomic Consequences And What To Expect," BORRADORES DE ECONOMIA 003573, BANCO DE LA REPÚBLICA. [Downloadable!]
  2. Fabrizio Perri & Vincenzo Quadrini, 2002. "The Great Depression in Italy: Trade Restrictions and Real Wage Rigidities," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 5(1), pages 128-151, January. [Downloadable!] (restricted)
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  3. Andrés Felipe Arias, 2001. "Banking Productivity And Economic Fluctuations: Colombia 1998-2000," BORRADORES DE ECONOMIA 002050, BANCO DE LA REPÚBLICA. [Downloadable!]
  4. 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. [Downloadable!]
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  5. V V Chari & Patrick J Kehoe & Ellen R. McGrattan, 2003. "Business Cycle Accounting," Levine's Bibliography 506439000000000421, UCLA Department of Economics. [Downloadable!]
    Other versions:
  6. Satyajit Chatterjee & Dean Corbae, 2006. "Monetary and financial forces in the Great Depression," Working Papers 06-12, Federal Reserve Bank of Philadelphia. [Downloadable!]
  7. Harrison, Sharon G & Weder, Mark, 2002. "Did Sunspot Forces Cause the Great Depression?," CEPR Discussion Papers 3267, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
    Other versions:
  8. Matteo Iacoviello, 2002. "House prices, borrowing constraints and monetary policy in the business cycle," Boston College Working Papers in Economics 542, Boston College Department of Economics, revised 06 Dec 2004. [Downloadable!]
    Other versions:
  9. Andrés Felipe Arias, . "The Colombian Banking and Crisis: Macroeconomic Consequences and What to Expect," Borradores de Economia 157, Banco de la Republica de Colombia. [Downloadable!]
  10. Lee E. Ohanian, 2001. "Why Did Productivity Fall So Much during the Great Depression?," American Economic Review, American Economic Association, vol. 91(2), pages 34-38, May. [Downloadable!] (restricted)
    Other versions:
  11. Charles W. Calomiris & Joseph R. Mason, 2003. "Consequences of Bank Distress During the Great Depression," American Economic Review, American Economic Association, vol. 93(3), pages 937-947, June. [Downloadable!]
  12. Charles I. Jones, 2004. "Growth and Ideas," NBER Working Papers 10767, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
    • Jones, Charles I., 2005. "Growth and Ideas," Handbook of Economic Growth, in: Philippe Aghion & Steven Durlauf (ed.), Handbook of Economic Growth, edition 1, volume 1, chapter 16, pages 1063-1111 Elsevier. [Downloadable!] (restricted)
  13. Dorofeenko, Viktor & Lee, Gabriel S. & Salyer, Kevin D., 2005. "Agency Costs and Investment Behavior," Economics Series 182, Institute for Advanced Studies. [Downloadable!]
  14. Andrés F. Arias, . "Banking Productivity and Economic Fluctuations: Colombia 1998-2000," Borradores de Economia 192, Banco de la Republica de Colombia. [Downloadable!]
  15. Harold L. Cole & Lee E. Ohanian, 2002. "The Great U.K. Depression: A Puzzle and Possible Resolution," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 5(1), pages 19-44, January. [Downloadable!] (restricted)
    Other versions:
  16. Michel, DE VROEY & Luca, PENSIEROSO, 2005. "Real Business Cycle Theory and the Great Depression : The Abandonment of the Absentionist Viewpoint," Discussion Papers (ECON - Département des Sciences Economiques) 2005054, Université catholique de Louvain, Département des Sciences Economiques. [Downloadable!]
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  17. Pedro Amaral & James C. MacGee, 2002. "The Great Depression in Canada and the United States: A Neoclassical Perspective," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 5(1), pages 45-72, January. [Downloadable!] (restricted)
    Other versions:
  18. Mark Gertler & Simon Gilchrist & Fabio Natalucci, 2003. "External Constraints on Monetary Policy and the Financial Accelerator," NBER Working Papers 10128, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
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