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How Could Everyone Have Been So Wrong? Forecasting The Great Depression With The Railroads

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  • Eugene N. White

    ()
    (Rutgers University and NBER)

  • John Landon-Lane

    ()
    (Rutgers University)

  • Adam Klug

    (Deceased)

Abstract

Contemporary observers viewed the recession that began in the summer of 1929 as nothing extraordinary. Recent analyses have shown that the subsequent large deflation was econometrically forecastable, implying that a driving force in the depression was the high expected real interest rates faced by business. Using a neglected data set of forecasts by railroad shippers, we find that business was surprised by the magnitude of the great depression. We show that an ARIMA or Holt- Winters model of railroad shipments would have produced much smaller forecast errors than those indicated by the surveys. The depth and duration of the depression was beyond the experience of business, which appears to have believed that recovery would happen quickly as in previous recessions. This failure to anticipate the collapse of the economy suggests roles for both high real rates of interest and a debt deflation in the propagation of the depression.

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Bibliographic Info

Paper provided by Rutgers University, Department of Economics in its series Departmental Working Papers with number 200209.

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Date of creation: 04 Jun 2002
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Handle: RePEc:rut:rutres:200209

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Keywords: deflation; forecasting; Great depression; railroads;

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  1. Bernanke, Ben & Gertler, Mark, 1989. "Agency Costs, Net Worth, and Business Fluctuations," American Economic Review, American Economic Association, vol. 79(1), pages 14-31, March.
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Cited by:
  1. Gregor W. Smith, 2006. "The Spectre of Deflation: A Review of Empirical Evidence," Working Papers 1086, Queen's University, Department of Economics.
  2. David Greasley & Les Oxley, 2010. "Cliometrics And Time Series Econometrics: Some Theory And Applications," Journal of Economic Surveys, Wiley Blackwell, vol. 24(5), pages 970-1042, December.
  3. Eugene N. White, 2006. "Anticipating the Stock Market Crash of 1929: The View from the Floor of the Stock Exchange," NBER Working Papers 12661, National Bureau of Economic Research, Inc.
  4. 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.
  5. Ritschl, Albrecht & Woitek, Ulrich, 2000. "Did Monetary Forces Cause the Great Depression?," CEPR Discussion Papers 2547, C.E.P.R. Discussion Papers.
  6. Marc Flandreau & Norbert Gaillard & Frank Packer, 2010. "To err is human: rating agencies and the interwar foreign government debt crisis," BIS Working Papers 335, Bank for International Settlements.
  7. Andrew Filardo & Claudio E. V. Borio, 2004. "Back to the future? Assessing the deflation record," BIS Working Papers 152, Bank for International Settlements.

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