Did Monetary Forces Cause the Great Depression? A Bayesian VAR Analysis for the U.S. Economy
This 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.
|Date of creation:||Jun 2000|
|Date of revision:|
|Contact details of provider:|| Postal: Adam Smith Building, Glasgow G12 8RT|
Phone: 0141 330 4618
Fax: 0141 330 4940
Web page: http://www.gla.ac.uk/schools/business/research/
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Eric M. Leeper & Christopher A. Sims & Tao Zha, 1996. "What Does Monetary Policy Do?," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 27(2), pages 1-78.
- repec:cup:etheor:v:10:y:1994:i:3-4:p:645-71 is not listed on IDEAS
- Dominguez, Kathryn M & Fair, Ray C & Shapiro, Matthew D, 1988.
"Forecasting the Depression: Harvard versus Yale,"
American Economic Review,
American Economic Association, vol. 78(4), pages 595-612, September.
- Ray C. Fair & Matthew D. Shapiro & Kathryn M. Dominguez, 1986. "Forecasting the Depression: Harvard Versus Yale," NBER Working Papers 2095, National Bureau of Economic Research, Inc.
- Ray C. Fair & Matthew D. Shapiro & Kathryn M. Dominguez, 1986. "Forecasting the Depression: Harvard Versus Yale," Cowles Foundation Discussion Papers 808, Cowles Foundation for Research in Economics, Yale University.
- Edward C. Prescott, 1999. "Some observations on the Great Depression," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Win, pages 25-29.
- Evans, Martin & Wachtel, Paul, 1993.
"Were price changes during the Great Depression anticipated? : Evidence from nominal interest rates,"
Journal of Monetary Economics,
Elsevier, vol. 32(1), pages 3-34, August.
- Martin Evans & Paul Wachtel, 1992. "Were Price Changes during the Great Depression Anticipated? Evidence from Nominal Interest Rates," Working Papers 92-12, New York University, Leonard N. Stern School of Business, Department of Economics.
- Bernanke, Ben S, 1983.
"Nonmonetary Effects of the Financial Crisis in Propagation of the Great Depression,"
American Economic Review,
American Economic Association, vol. 73(3), pages 257-76, June.
- Ben S. Bernanke, 1983. "Non-Monetary Effects of the Financial Crisis in the Propagation of the Great Depression," NBER Working Papers 1054, National Bureau of Economic Research, Inc.
- Thomas Doan & Robert B. Litterman & Christopher A. Sims, 1983.
"Forecasting and Conditional Projection Using Realistic Prior Distributions,"
NBER Working Papers
1202, National Bureau of Economic Research, Inc.
- Thomas Doan & Robert B. Litterman & Christopher A. Sims, 1986. "Forecasting and conditional projection using realistic prior distribution," Staff Report 93, Federal Reserve Bank of Minneapolis.
- Klug, Adam & Landon-Lane, John S. & White, Eugene N., 2005.
"How could everyone have been so wrong? Forecasting the Great Depression with the railroads,"
Explorations in Economic History,
Elsevier, vol. 42(1), pages 27-55, January.
- Eugene N. White & John Landon-Lane & Adam Klug, 2002. "How Could Everyone Have Been So Wrong? Forecasting The Great Depression With The Railroads," Departmental Working Papers 200209, Rutgers University, Department of Economics.
- John Landon-Lane & Eugene N. White & Adam Klug, 2002. "How Could Everyone Have Been So Wrong? Forecasting the Great Depression with the Railroads," NBER Working Papers 9011, National Bureau of Economic Research, Inc.
- Temin, Peter & Wigmore, Barrie A., 1990. "The end of one big deflation," Explorations in Economic History, Elsevier, vol. 27(4), pages 483-502, October.
- Sims, Christopher A, 1980. "Macroeconomics and Reality," Econometrica, Econometric Society, vol. 48(1), pages 1-48, January.
- Nathan Balke & Robert J. Gordon, 1986. "Appendix B: Historical Data," NBER Chapters, in: The American Business Cycle: Continuity and Change, pages 781-850 National Bureau of Economic Research, Inc.
- Sims, Christopher A & Uhlig, Harald, 1991.
"Understanding Unit Rooters: A Helicopter Tour,"
Econometric Society, vol. 59(6), pages 1591-99, November.
- Christopher A. Sims & Harald Uhlig, 1988. "Understanding unit rooters: a helicopter tour," Discussion Paper / Institute for Empirical Macroeconomics 4, Federal Reserve Bank of Minneapolis.
- Mayer, Thomas, 1978. "Money and the Great Depression: A critique of professor Temin's thesis," Explorations in Economic History, Elsevier, vol. 15(2), pages 127-145, April.
- Uhlig, Harald, 1994. "What Macroeconomists Should Know about Unit Roots: A Bayesian Perspective," Econometric Theory, Cambridge University Press, vol. 10(3-4), pages 645-671, August.
- Robert J. Gordon & James A. Wilcox, 1978. "Monetarist Interpretations of the Great Depression: An Evaluation and Critique," NBER Working Papers 0300, National Bureau of Economic Research, Inc.
- Hamilton, James D., 1987. "Monetary factors in the great depression," Journal of Monetary Economics, Elsevier, vol. 19(2), pages 145-169, March.
- Hamilton, James D, 1992. "Was the Deflation during the Great Depression Anticipated? Evidence from the Commodity Futures Market," American Economic Review, American Economic Association, vol. 82(1), pages 157-78, March.
When requesting a correction, please mention this item's handle: RePEc:gla:glaewp:2000_07. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Jeanette Findlay)
If references are entirely missing, you can add them using this form.