Uncertainty and Durable Consumption in the Great Depression

João Miguel Ejarque ()

No 97-04, Discussion Papers from University of Copenhagen. Department of Economics

Abstract: This paper investigates Romer's (1990) hypothesis linking uncertainty caused by the October 1929 crash with durable expenditure movements and the start of the downturn. The author estimates conditional variances for macroeconomic data, and computes the variance of stock returns. These goods are subject to different degrees of irreversibility. The response to a mean preserving spread implies a relative increase in investment in the less irreversible good -- in this case consumer durables. Therefore, a drop in durable consumption can be a sign of recession only because investment in physical capital is falling even more. However, there is no clear evidence supporting this implication, following the October crash.

Keywords: uncertainty; irreversibility; Great Depression; durables; investment (search for similar items in EconPapers)
JEL-codes: E21 E22 E32 N12 (search for similar items in EconPapers)
Date: 1997-04
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