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Deflation and the international Great Depression: a productivity puzzle Author info | Abstract | Publisher info | Download info | Related research | Statistics Harold L. Cole
Lee E. Ohanian
Ron Leung
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This paper presents a dynamic, stochastic general equilibrium study of the causes of the international Great Depression. We use a fully articulated model to assess the relative contributions of deflation/monetary shocks, which are the most commonly cited shocks for the Depression, and productivity shocks. We find that productivity is the dominant shock, accounting for about 2/3 of the Depression, with the monetary shock accounting for about 1/3. The main reason deflation doesn’t account for more of the Depression is because there is no systematic relationship between deflation and output during this period. Our finding that a persistent productivity shock is the key factor stands in contrast to the conventional view that a continuing sequence of unexpected deflation shocks was the major cause of the Depression. We also explore what factors might be causing the productivity shocks. We find some evidence that they are largely related to industrial activity, rather than agricultural activity, and that they are correlated with real exchange rates and non-deflationary shocks to the financial sector.
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Paper provided by Federal Reserve Bank of Minneapolis in its series Staff Report with number
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Date of creation: 2005Date of revision:
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KOBAYASHI Keiichiro & YANAGAWA Noriyuki, 2008.
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AKIYOSHI Fumio & KOBAYASHI Keiichiro, 2007.
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"Bank Distress and the Borrowers' Productivity ,"
CIRJE F-Series
CIRJE-F-521, CIRJE, Faculty of Economics, University of Tokyo.
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