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Investment and Uncertainty: Precipitating the Great Depression in the United States

  • DAVID GREASLEY
  • JAKOB B. MADSEN

A severe collapse of fixed capital formation distinguished the onset of the Great Depression from other investment downturns between the world wars. Using a model estimated for the years 1890-2000, we show that the expected profitability of capital measured by Tobin's "q", and the uncertainty surrounding expected profits indicated by share price volatility, were the chief influences on investment levels, and that heightened share price volatility played the dominant role in the crucial investment collapse in 1930. Investment did not simply follow the downward course of income at the onset of the depression: rather, its slump helped to propel the wider collapse. Copyright (c) The London School of Economics and Political Science 2006.

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Article provided by London School of Economics and Political Science in its journal Economica.

Volume (Year): 73 (2006)
Issue (Month): 291 (08)
Pages: 393-412

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Handle: RePEc:bla:econom:v:73:y:2006:i:291:p:393-412
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