Deflation and the international Great Depression: a productivity puzzle

Harold Cole (), Lee Edward Ohanian () and Ron Leung

No 356, Staff Report from Federal Reserve Bank of Minneapolis

Abstract: This paper presents a dynamic, stochastic general equilibrium study of the causes of the international Great Depression. We use a fully articulated model to assess the relative contributions of deflation/monetary shocks, which are the most commonly cited shocks for the Depression, and productivity shocks. We find that productivity is the dominant shock, accounting for about 2/3 of the Depression, with the monetary shock accounting for about 1/3. The main reason deflation doesn't account for more of the Depression is because there is no systematic relationship between deflation and output during this period. Our finding that a persistent productivity shock is the key factor stands in contrast to the conventional view that a continuing sequence of unexpected deflation shocks was the major cause of the Depression. We also explore what factors might be causing the productivity shocks. We find some evidence that they are largely related to industrial activity, rather than agricultural activity, and that they are correlated with real exchange rates and non-deflationary shocks to the financial sector.

Keywords: Depressions; Deflation (Finance); Production (Economic theory) (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-dge, nep-his and nep-mac
Date: 2005
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Working Paper: Deflation and the International Great Depression: A Productivity Puzzle (2005)
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