Did Monetary Forces Cause the Great Depression? A Bayesian VAR Analysis for the U.S. Economy
AbstractThis paper recasts Temin's (1976) question of whether monetary forces caused the Great Depression in a modern time series framework. We adopt a Bayesian estimation and forecasting algorithm to evaluate the e ects of monetary policy against nonmonetary alternatives, allowing for time-varying parameters and coeffcient updating. We nd that the predictive power of monetary policy is very small for the early phase of the depression and breaks down almost entirely after 1931. During the propagation phase of 1930-31, monetary policy is able to forecast correctly at short time horizons put in- variably predicts recovery at longer horizons. Con rming Temin (1976), we nd that nonmonetary leading indicators, particularly on residential construc- tion and equipment investment, have impressive predictive power. Already in September 1929, they forecast about two thirds of downturn correctly. Our time varying framework also permits us to examine the stability of the dy- namic parameter structure of our estimates. We nd that the monetary im- pulse responses exhibit remarkable structural instability and react clearly to changes in the monetary regime that occurred during the depression. We nd this phenomenon to be discomforting in the light of the Lucas (1976) critique, as it suggests that the money/income relationship may itself have been en- dogenous to policy and was not in the set of deep parameters of the U.S. economy. Given the instability and poor predictive power of monetary instru- ments and the strong showing of leading indicators on real activity, we remain skeptical with regard to a monetary interpretation of the Great Depression in the U.S.
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Bibliographic InfoPaper provided by Business School - Economics, University of Glasgow in its series Working Papers with number 2000_07.
Date of creation: Jun 2000
Date of revision:
Other versions of this item:
- Albrecht Ritschl & Ulrich Woitek, . "Did Monetary Forces Cause the Great Depression? A Bayesian VAR Analysis for the U.S. Economy," IEW - Working Papers 050, Institute for Empirical Research in Economics - University of Zurich.
- N12 - Economic History - - Macroeconomics and Monetary Economics; Industrial Structure; Growth; Fluctuations - - - U.S.; Canada: 1913-
- E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation: Models and Applications
- E47 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Forecasting and Simulation: Models and Applications
- C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
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