nonmonetary effects of the financial crisis in propagation of the great depression this paper examines the effects of the financial crisis of the 1930s onthe path of aggregate output during that period our approach is complementary to that of friedman and schwartz who emphasized the monetary impact of the bank failures we focus on non monetary primarily credit related aspects of the financial sector output link and consider the problems of debtors as well as those of the banking system we argue that the financial disruptions of 1930 33 reduced the efficiency of the credit allocation process and that the resulting higher cost and reduced availability of credit acted to depress aggregate demand evidence suggests that effects of this type can help explain the unusual length and depth of the great depression this abstract was borrowed from another version of this item

irving fisher on the international transmission of booms and depressions through monetary standards the role of monetary standards in the international transmission of economic fluctuations particularly the role of the gold standard in the depression has attracted considerable recent attention for instance from choudhri and kochin 1980 hamilton 1988 temin 1989 1993 eichengreen 1992 and bernanke 1995 however this literature has overlooked a pioneering precursor irving fisher are booms and depressions transmitted internationally through monetary standards 1935 which has also been neglected in the literature on fisher i examine fisher s contribution in the context of later research on the topic and explore the place of fisher 1935 in fisher s work

the impact of milton friedman on modern monetary economics setting the record straight on paul krugman s who was milton friedman abstract paul krugman s essay who was milton friedman seriously mischaracterizes friedman s economics and his legacy in this paper we provide a rejoinder to krugman on these issues in the course of setting the record straight we provide a self contained guide to milton friedman s impact on modern monetary economics and on today s central banks we also refute the conclusions that krugman draws about monetary policy from the experiences of the united states in the 1930s and of japan in the 1990s

changes in the cyclical sensitivity of wages in the united states 1891 1987 the conventional wisdom that nominal wages became less sensitive to the business cycle and more autocorrelated after world war ii is reexamined here by considering whether these properties are artifacts of the methods used to construct prewar wage series a replication based on these methods is more cyclically sensitive and exhibits less autocorrelation than the postwar data aggregation using variable instead of fixed employment weights also greatly exaggerates the cyclicality of prewar wages these biases imply that wages are just as sensitive to the cycle today as one hundred years ago perhaps even more so copyright 1992 by american economic association

two who called the great depression an initial formulation of the monetary origins view the consensus view in the economics profession today is that the genesis of the great depression was the tightening of policy by the fed in 1928 and 1929 mainly to stem the stock market boom nevertheless monetary historians have not provided evidence that any economist writing prior to the stock market crash of october 1929 foresaw that the fed s actions would lead to a major depression this paper shows that two economists william foster and waddill catchings co authored a paper in july 1929 containing arguments strikingly similar to the present consensus view their critique of fed policy supports the view that the genesis of the great depression had monetary origins and was preventable

the ups and downs of capitalism ben bernanke is a leading macroeconomist who has contributed extensively to the literature on business cycles monetary policy the role of financial markets in economic fluctuations inflation targeting and the economics of the great depression he is one of the six economists who form the nber business cycle dating committee a group that determines the dates of recessions in the us in this article interview professor bernanke discusses issues relating to the great depression of the 1930s and problems relating to inflation in the latter half of the twentieth century

could stable money have averted the great contraction i introduction although over fifty years have elapsed since the onset of the great contraction controversy still swirls about the factors responsible for its depth and long duration a basic issue is the hypothesis due to friedman and schwartz 1963 that the great contraction would have been attenuated had the federal reserve not allowed the money stock to decline although the validity of the hypothesis has been a subject of much debate there is little empirical evidence directly addressing it a direct test of the friedman and schwartz hypothesis requires simulating the behavior of output under a counterfactual policy of stable money that approach was adopted by warburton 1966 friedman 1960 and modigliani 1969 none of whom constructed a model of the economy on the basis of which to conduct his test recently mccallum 1990 has used simulations from a macro model to show that his base rule with feedback would have avoided the severe decline in nominal income that occurred between 1929 and 1933 1 the extent to which his rule would have improved the behavior of nominal income depends on the value of the feedback coefficient mccallum s simulations however do not address the issue considered here of how a stable money rule would have performed in this paper we present simulations that focus on the stable money counterfactual our model is based on mccallum s but we use a more general framework than his that a estimates separate relations for output and the price level and b places no prior restrictions on the feedback from output and the price level to money our stable money counterfactual does not change the long term rate of money growth from that actually experienced and thus involves only short run changes in the behavior of the money supply we assume that dynamics embedded in the output and price relation are not especially sensitive to this type of policy change we simulate two variants of milton friedman s 1960 constant money growth rule the first a strong form of the rule assumes that the fed could quickly offset changes in the money multiplier by changes in high powered money and thus keep the money stock on the constant growth rate path in each quarter the second a weaker form of the rule assumes that the money multiplier is observed with a one quarter lag and the fed can only set the expected rate of growth of money conditional on last period information equal to the constant rate our basic simulation is derived from a model estimated for the 1921 1 1941 4 interwar period the results of this simulation buttress the views of friedman and schwartz had a constant money growth rule with an annual rate equal to the average 1921 41 rate of 2 95 percent been followed throughout the interwar period the great contraction would have been avoided real output would have declined from 1929 3 to 1933 1 but the order of magnitude of the cumulative change 11 1 to 21 6 percent and the annual rate of change 3 3 to 6 6 percent when the actual cumulative change was 36 2 percent and the annual rate of change was 12 1 percent would have been comparable to other recessions in the nineteenth and twentieth centuries in the basic simulation we assume that the output and price relations remained stable over the entire interwar period the extraordinary economic conditions of the great contraction could have arguably shifted the output and price relations thus we also present an alternative simulation that uses estimates of these relations based on the 1920s data this simulation shows that a constant money growth rule with an annual rate equal to the 1921 29 average of 3 29 percent would have prevented even a mild recession during the great contraction period section ii contains a brief survey of the continuing debate over the cause and propagation mechanism of the great contraction and its implications for the stable money hypothesis

real business cycle models of the great depression a critical survey recent years have witnessed a revival of interest in the great depression of the 1930s among the differing new interpretations the real business cycle rbc approach is particularly significant it represents an outstanding methodological innovation in trying to cast the great depression within an equilibrium framework this paper critically reviews the rbc interpretation of the great depression clarifying its theoretical and methodological foundations and paving the way for future assessments of its validity

rational expectations and price rigidity in a monopolistically competitive market this paper analyses monopolistically competitive markets under incomplete information facing unanticipated disturbances firms determine their prices before they have information about other firms prices and form their expectations about the average price rationally if the market becomes very competitive in the sense that the price elasticity of individual demand is close to infinity then the average price is completely insensitive to short run unanticipated disturbances in the intermediate case if a cost disturbances are uniform and b demand and cost disturbances are correlated then the average price is sensitive to cost and insensitive to demand

the macroeconomics of the great depression a comparative approach recently research on the causes of the great depression has shifted from a heavy emphasis on events in the united states to a broader more comparative approach that examines the interwar experiences of many countries simultaneously in this lecture i survey the current state of our knowledge about the depression from a comparative perspective on the aggregate demand side of the economy comparative analysis has greatly strengthened the empirical case for monetary shocks as a major driving force of the depression an interesting possibility suggested by this analysis is that the worldwide monetary collapse that began in 1931 may be interpreted as a jump from one nash equilibrium to another on the aggregate supply side comparative empirical studies provide support for both induced financial crisis and sticky nominal wages as mechanisms by which nominal shocks had real effects still unresolved is why nominal wages did not adjust more quickly in the face of mass unemployment this abstract was borrowed from another version of this item

international aspects of the great depression and the crisis of 2007 similarities differences and lessons we focus on two international aspects of the great depression financial crises and international trade and try to discern lessons for the current economic crisis both downturns featured global banking crises which were generated by boom slump macroeconomic cycles during both crises world trade collapsed faster than world incomes and the trade decline was highly synchronized across countries during the depression income losses and rises in trade barriers explain trade s collapse owing to vertical specialization and more intense trade in durables today s trade collapse is due to uncertainty and small shocks to trade costs hitting international supply chains so far the global economy has avoided the global trade wars and banking collapses of the depression perhaps owing to improved policy even so the global economy remains susceptible to large shocks owing to financial innovation and technological

debt deflation theory and evidence abstract in the early 1990s the most severe recessions occurred in those countries which had experienced the largest increases in private debt burdens was this an accident of history or did it reflect deeper forces affecting market economies the paper comprises three parts first it presents three stylised facts about debt and its impact on consumption growth in the 1930s and the 1990s second it discusses the reception of irving fisher s work on debt deflation by his contemporaries and argues that it is helpful to think of debt deflation as a real business cycle phenomenon third there is a theoretical discussion of the reaction of debt and consumption to shocks in the context of a model of precautionary saving central to the model is the role of distributional shocks which implies that aggregate demand may be a nonmonotonic function of the price of assets in terms of the consumption good multiple equilibria may exist leading to the possibility of financial instability the analysis of debt deflation requires the construction of real business cycle models without a representative consumer

golden fetters the gold standard and the great depression barry eichengreen oxford university press new york 1992 pp xix 448 39 95

the new deal and modern memory summary economists and other social scientists may never be able to explain fully why the greatdepression happened when it did or why it initially was so severe numerous hypotheses havebeen advanced as we have seen and each of them contributes important insights into thecauses of the macroeconomic calamity in which most of the world was mired in 1929 1933 if however one is forced to adopt a monocausal theory it must center on the actions of america scentral bank which presided over an extraordinary expansion in bank credit in the mid to late1920s and then took the punch bowl off the table for the purposes of this article though the key question is why did the great depressionlast longer in the united states than it did in any other nation the answer as laid out in thenext section is presidential politics 23 there will come seven years of great plenty throughout all the land of egypt but after them will arise seven years offamine and all the plenty will be forgotten in the land of egypt the famine will consume the land genesis 41 29 30 nkjv

the nation in depression t he economic cataclysm of the 1930s was an international phenomenon experienced by countries in all parts of the globe countries as diverse as the united states germany chile and japan all experienced significant depressions in the 1930s thus the title of charles kindleberger s classic book the world in depression 1973 captures an important feature of the great depression these international aspects especially the importance of the gold standard in causing the downturn and transmitting depression from one country to another have been emphasized in recent years in excellent books by peter temin 1989 and barry eichengreen 1992 these books have rightly received widespread attention and have successfully changed the focus of much analysis of the great depression from the united states to the world economy while such a change from american provincialism is surely healthy and warranted adopting an international perspective on the great depression risks losing sight of the many ways in which the u s depression differed in timing and severity from depressions elsewhere more important it may obscure the many uniquely american causes of america s great depression this paper examines the ways in which the u s experience during the 1930s resembled that of other countries in some regards and fundamentally differed in other aspects i also evaluate the evidence on the causes of the great depression in the united states and the sources of the eventual recovery i suggest that the path of american output and unemployment before 1931 can be explained quite well with only domestic factors even after 1931

a behavioral explanation for nominal wage rigidity during the great depression nominal wages in manufacturing were left unchanged by the large decline in nominal demand that marked the first two years of the great depression this rigidity in nominal wages is explained using the tools of the behavioral theory of the firm the emphasis is on the reasons firms changed their decision rules linking fluctuations in final sales to changes in nominal wages

financial frictions and employment during the great depression abstract we provide new evidence that a disruption in credit supply played a quantitatively significant role in the unprecedented contraction of employment during the great depression using a novel hand collected dataset of large industrial firms our identification strategy exploits preexisting variation in the need to raise external funds at a time when public bond markets essentially froze local bank failures inhibited firms ability to substitute public debt for private debt which exacerbated financial constraints we estimate a large and negative causal effect of financing frictions on firm employment we find that the lack of access to credit likely accounted for a substantial fraction of the aggregate decline in employment of large firms between 1928 and 1933

wage theory new deal labor policy and the great depression were government and unions to blame a growing number of economists blame the length and severity of the great depression on factors that rigidified wage rates raised production costs and interfered with the market allocation of labor the target of their critique is president franklin roosevelt s new deal labor program which they portray as creating a series of large negative supply shocks through encouragement of unions minimum wages unemployment insurance and other anticompetitive industrial relations practices the author uses a combination of institutional and keynesian theory to present the other side of the story drawing principally from the works of j r commons and j m keynes he develops both a spending and productivity rationale for stable wages during the great depression and demonstrates that the new deal s interventionist labor program was on balance necessary and beneficial he also highlights the neglected macroeconomic dimension of industrial relations theory and policy

exploring the present through the past claudia goldin is one of the world s leading economists and economic historians and has made a series of outstanding and original contributions particularly to the cliometric or the new economic history literature in this interview professor goldin discusses with brian snowdon who first provides a background introduction several important issues relating to her research on economic history and cliometrics the economics of slavery us economic history corruption in america the role of human capital and education in us economic development wage inequality female labour force participation and the quiet revolution the influence of the contraceptive pill women s surnames the reversal of the college gender gap and women in the economics profession

measuring and predicting heterogeneous recessions this paper examines the usefulness of a more refined business cycle classification for monthly industrial production ip beyond the usual distinction between expansions and contractions univariate markov switching models show that a three regime model is more appropriate than a model with only two regimes interestingly the third regime captures severe recessions contrasting the conventional view that the additional third regime represents a recovery phase this is confirmed by means of markov switching vector autoregressive models that allow for phase shifts between the cyclical regimes of ip and the conference board s leading economic index lei the timing of the severe recession regime mostly corresponds with periods of substantial financial market distress and severe credit squeezes providing empirical evidence for the financial accelerator theory

monetary intervention mitigated banking panics during the great depression quasi experimental evidence from a federal reserve district border 1929 1933 the federal reserve act divided mississippi between the 6th atlanta and 8th st louis districts during the great depression these districts policies differed atlanta championed monetary activism and the extension of aid to ailing banks st louis eschewed expansionary initiatives during a banking crisis in 1930 atlanta expedited lending to banks in need st louis did not outcomes differed across districts in atlanta banks survived at higher rates lending continued at higher levels commerce contracted less and recovery began earlier these patterns indicate that central bank intervention influenced bank health credit availability and business activity

customer markets and price sensitivity this paper investigates the behavior of prices in customer markets of the phelps winter type under uncertainty it is shown that the responsiveness of prices to short run demand and cost changes depends crucially on whether the marginal customer is price risk averse or price risk loving if he is price risk averse loving then the customer market price is less more flexible than the monopoly price competition makes the customer market price more rigid flexible if the marginal customer is price risk averse loving the scope of rigid customer market prices is wide if near rational behavior of customers and the adjustment cost in the consumption process are taken into consideration copyright 1989 by the london school of economics and political science

did sunspot forces cause the great depression abstract we apply a dynamic general equilibrium model to the period of the u s great depression in particular we examine a modification of the real business cycle model in which the possibility of indeterminacy of equilibria arises in other words agents self fulfilling expectations can serve as a primary impulse behind fluctuations we find that the model driven only by these measured sunspot shocks can explain well the entire depression era that is the decline from 1929 to 1932 the subsequent slow recovery and the recession that occurred in 1937 1938

the great crash and the onset of the great depression this paper argues that the collapse of stock prices in october 1929 generated temporary uncertainty about future income which led consumers to forgo purchases of durable goods that the great crash generated uncertainty is evidenced by the decline in surety expressed by contemporary forecasters that this uncertainty affected consumer behavior is shown by the fact that spending on consumer durables declined drastically in late 1929 while spending on perishable goods rose slightly this effect is confirmed by the fact that there is a significant negative relationship between stock market variability and the production of consumer durables in the prewar era

real business cycle views of the great depression and recent events a review of timothy j kehoe and edward c prescott s great depressions of the twentieth century this book collects essays most of which were published earlier into an advertisement for real business cycle rbc analysis half of the essays discuss the great depression half discuss events of the 1980s and 1990s they all use the general equilibrium model of economic growth to analyze short run fluctuations in the rate of economic growth of various countries i find that the use of closed economy models without frictions is not useful for the analysis of short run variations in the rate of economic growth almost all of these essays end by claiming that variations in the rate of gdp growth were due to changes in the rate of total factor productivity tfp growth they do not provide any explanation for fluctuations in the rate of tfp growth leaving the reader no closer to understanding these periods of depression and slow growth i discuss in turn the essays on the great depression the essays on more recent fluctuations and the definition of great depressions used in this volume

external support during the transition phase roles for humanitarian aid and development assistance from a village perspective summary development orthodoxy based on macroeconomic theory stresses the importance of physical and human capital accumulation as necessary elements for economic growth growing concern among development practitioners that textbook economic theory and results from formal questionnaires may not converge with the perceptions of the recipients of aid however has lead to an increase in the use of participatory appraisals and related approaches to explore resettled villagers perceptions of aid and its role in reducing poverty the research followed two techniques described in the literature on participatory rural appraisal a a wealth ranking exercise to examine villagers concepts of poverty and the determinants of growth and b semi structured group discussions to explore villagers thoughts on the role of aid what is reassuring from this exercise is the convergence between villagers perceptions of poverty and the role of aid with the implications of the economics literature and the results from administration of a formal household questionnaire

a note on price rigidity pledging stable prices under sluggish information diffusion and costly search abstract this note presents a model of rigid price equilibrium based on sluggish information diffusion and costly search with exogenous shocks firms can pledge non contingent prices before the realization of a particular state of nature and such a pledge reduces the search cost of consumers the model suggests that firms make the rigid price pledge in equilibrium under a wide range of conditions

is increased price flexibility stabilizing this paper uses john taylor s model of overlapping contracts to show that increased wage and price flexibility can easily be destabilizing because of the mundell effect while lower prices increase output the expectation of falling prices decreases output simulations based on realistic parameter values suggest that increases in price flexibility might well increase the cyclical variability of output in the united states copyright 1986 by american economic association

monetary factors in the great depression this paper examines the role of monetary policy in the early stages of the great depression and considers the mechanism whereby this policy may have affected real activity i conclude that the depression was preceded by a dramatic shift towards a highly contractionary monetary policy the economic impact of this policy seems unlikely to have come through the conventional keynesian channels of a shortage of liquidity and high ex ante real interest rates but instead may have operated through unanticipated deflation and after 1930 through the disruption of financial intermediation as a consequence of the banking panics

the impact of monetary policy in the midst of big shocks abstract this paper studies the impact of federal reserve policies that created the largest deviations from price stability during the fed s first 100 years the post world war i deflation the deflation of the great depression the inflation of world war ii and the great inflation of the 1970s in terms of their macroeconomic impacts i find that deflation was uniquely depressing in the 1930s because of cartel policies that prevented nominal prices and wages from adjusting to clear markets and not because deflation is generically depressing i find that the biggest impact of monetary policy during world war ii was in debasing debt through inflation i find that the main drivers of the 1970s economy were long run changes in productivity and the labor market and that there may have been little that the fed could have done at this time to expand employment and output more broadly i find that macroeconomic performance would have been better over the fed s first century had the fed followed a monetary policy to deliver stable prices