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

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  • DAVID GREASLEY
  • JAKOB B. MADSEN

Abstract

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.

Suggested Citation

  • David Greasley & Jakob B. Madsen, 2006. "Investment and Uncertainty: Precipitating the Great Depression in the United States," Economica, London School of Economics and Political Science, vol. 73(291), pages 393-412, August.
  • Handle: RePEc:bla:econom:v:73:y:2006:i:291:p:393-412
    DOI: 10.1111/j.1468-0335.2006.00505.x
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    File URL: https://doi.org/10.1111/j.1468-0335.2006.00505.x
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    1. Simon Kuznets & Elizabeth Jenks, 1961. "Appendices and Index, "Capital in the American Economy: Its Formation and Financing"," NBER Chapters, in: Capital in the American Economy: Its Formation and Financing, pages 465-664, National Bureau of Economic Research, Inc.
    2. Simon Kuznets & Elizabeth Jenks, 1961. "Capital in the American Economy: Its Formation and Financing," NBER Books, National Bureau of Economic Research, Inc, number kuzn61-1, March.
    3. Simon Kuznets & Elizabeth Jenks, 1961. "Introduction to "Capital in the American Economy: Its Formation and Financing"," NBER Chapters, in: Capital in the American Economy: Its Formation and Financing, pages 3-14, National Bureau of Economic Research, Inc.
    4. Leo Grebler & David M. Blank & Louis Winnick, 1956. "Capital Formation in Residential Real Estate: Trends and Prospects," NBER Books, National Bureau of Economic Research, Inc, number greb56-1, March.
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    Cited by:

    1. Joëts, Marc & Mignon, Valérie & Razafindrabe, Tovonony, 2017. "Does the volatility of commodity prices reflect macroeconomic uncertainty?," Energy Economics, Elsevier, vol. 68(C), pages 313-326.
    2. Bernard C. Beaudreau, 2017. "Electrification, the Smoot-Hawley Tariff Act and the Decline in Investment Expenditure in 1931–1932: Testing the Excess-Capacity Hypothesis," International Advances in Economic Research, Springer;International Atlantic Economic Society, vol. 23(3), pages 295-308, August.
    3. Vivek Ghosal & Yang Ye, 2015. "Uncertainty and the employment dynamics of small and large businesses," Small Business Economics, Springer, vol. 44(3), pages 529-558, March.
    4. Kyle Jurado & Sydney C. Ludvigson & Serena Ng, 2015. "Measuring Uncertainty," American Economic Review, American Economic Association, vol. 105(3), pages 1177-1216, March.
    5. Vivek Ghosal & Yang Ye, 2015. "Uncertainty and the employment dynamics of small and large businesses," Small Business Economics, Springer, vol. 44(3), pages 529-558, March.
    6. George S. Tavlas, 2011. "Two Who Called the Great Depression: An Initial Formulation of the Monetary‐Origins View," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 43(2‐3), pages 565-574, March.
    7. Ghosal, Vivek & Ye, Yang, 2019. "The impact of uncertainty on the number of businesses," Journal of Economics and Business, Elsevier, vol. 105(C).
    8. F. Bacchini & M. E. Bontempi & R. Golinelli & C. Jona Lasinio, 2014. "ICT and Non-ICT investments: short and long run macro dynamics," Working Papers wp956, Dipartimento Scienze Economiche, Universita' di Bologna.
    9. Holmes, Mark J. & Maghrebi, Nabil, 2016. "Financial market impact on the real economy: An assessment of asymmetries and volatility linkages between the stock market and unemployment rate," The Journal of Economic Asymmetries, Elsevier, vol. 13(C), pages 1-7.
    10. Vivek Ghosal & Yang Ye, 2013. "Business Decision-Making under Uncertainty: Evidence from Employment and Number of Businesses," CESifo Working Paper Series 4312, CESifo.
    11. Maria Elena Bontempi, 2016. "Investment--uncertainty relationship: differences between intangible and physical capital," Economics of Innovation and New Technology, Taylor & Francis Journals, vol. 25(3), pages 240-268, April.
    12. Alexopoulos, Michelle & Cohen, Jon, 2009. "Measuring our ignorance, one book at a time: New indicators of technological change, 1909-1949," Journal of Monetary Economics, Elsevier, vol. 56(4), pages 450-470, May.
    13. Bontempi, Maria Elena & Golinelli, Roberto & Parigi, Giuseppe, 2010. "Why demand uncertainty curbs investment: Evidence from a panel of Italian manufacturing firms," Journal of Macroeconomics, Elsevier, vol. 32(1), pages 218-238, March.
    14. Gabriel P. Mathy, 2020. "How much did uncertainty shocks matter in the Great Depression?," Cliometrica, Springer;Cliometric Society (Association Francaise de Cliométrie), vol. 14(2), pages 283-323, May.

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