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How Could Everyone Have Been So Wrong? Forecasting the Great Depression with the Railroads

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  • John Landon-Lane
  • Eugene N. White
  • Adam Klug

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.

Suggested Citation

  • 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.
  • Handle: RePEc:nbr:nberwo:9011
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    Cited by:

    1. Kevin Hjortshøj O’Rourke & Sang Seok Lee & Martin Ellison, 2020. "The Ends of 30 Big Depressions," Working Papers 20200035, New York University Abu Dhabi, Department of Social Science, revised May 2020.
    2. Martin Ellison & Sang Seok Lee & Kevin Hjortshøj O'Rourke, 2020. "The Ends of 27 Big Depressions," NBER Working Papers 27586, National Bureau of Economic Research, Inc.
    3. Gregor W. Smith, 2006. "The spectre of deflation: a review of empirical evidence," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 39(4), pages 1041-1072, November.
    4. Benmelech, Efraim & Frydman, Carola & Papanikolaou, Dimitris, 2019. "Financial frictions and employment during the Great Depression," Journal of Financial Economics, Elsevier, vol. 133(3), pages 541-563.
    5. Monnet, Eric & Velde, François R., 2020. "Money, Banking, and Old-School Historical Economics," CEPR Discussion Papers 15348, C.E.P.R. Discussion Papers.
    6. Binder, Carola Conces, 2016. "Estimation of historical inflation expectations," Explorations in Economic History, Elsevier, vol. 61(C), pages 1-31.
    7. Andrew Filardo & Claudio E. V. Borio, 2004. "Back to the future? Assessing the deflation record," BIS Working Papers 152, Bank for International Settlements.
    8. Flandreau, Marc & Gaillard, Norbert & Packer, Frank, 2011. "To err is human: US rating agencies and the interwar foreign government debt crisis," European Review of Economic History, Cambridge University Press, vol. 15(3), pages 495-538, December.
    9. Gabriel Mathy & Herman Stekler, 2018. "Was the deflation of the depression anticipated? An inference using real-time data," Journal of Economic Methodology, Taylor & Francis Journals, vol. 25(2), pages 117-125, April.
    10. Saleuddin, Rasheed & Coffman, D’Maris, 2018. "Can inflation expectations be measured using commodity futures prices?," Structural Change and Economic Dynamics, Elsevier, vol. 45(C), pages 37-48.
    11. Mathy, Gabriel & Stekler, Herman, 2017. "Expectations and forecasting during the Great Depression: Real-time evidence from the business press," Journal of Macroeconomics, Elsevier, vol. 53(C), pages 1-15.
    12. Albrecht Ritschl & Ulrich Woitek, "undated". "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.
    13. Weber Ernst Juerg, 2010. "The Role of the Real Interest Rate in U.S. Macroeconomic History," The B.E. Journal of Macroeconomics, De Gruyter, vol. 10(1), pages 1-26, April.
    14. 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.
    15. Jalil, Andrew J. & Rua, Gisela, 2016. "Inflation expectations and recovery in spring 1933," Explorations in Economic History, Elsevier, vol. 62(C), pages 26-50.
    16. Andrew Jalil & Gisela Rua, 2015. "Inflation Expectations and Recovery from the Depression in 1933: Evidence from the Narrative Record," Finance and Economics Discussion Series 2015-29, Board of Governors of the Federal Reserve System (U.S.).
    17. 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.
    18. Daniel, Volker & Steege, Lucas ter, 2020. "Inflation expectations and the recovery from the Great Depression in Germany," Explorations in Economic History, Elsevier, vol. 75(C).
    19. Gabriel Mathy & Christian Roatta, 2018. "Forecasting the 1937-1938 Recession: Quantifying Contemporary Newspaper Forecasts," Working Papers 2018-004, The George Washington University, Department of Economics, H. O. Stekler Research Program on Forecasting.
    20. Ritschl, Albrecht & Woitek, Ulrich, 2000. "Did Monetary Forces Cause the Great Depression?," CEPR Discussion Papers 2547, C.E.P.R. Discussion Papers.

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    More about this item

    JEL classification:

    • E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data)
    • N12 - Economic History - - Macroeconomics and Monetary Economics; Industrial Structure; Growth; Fluctuations - - - U.S.; Canada: 1913-

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