Financial Market Shocks during the Great Depression

Chin Alycia () and Missaka Warusawitharana
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Chin Alycia: Board of Governors of the Federal Reserve System

The B.E. Journal of Macroeconomics, 2010, vol. 10, issue 1, 27

Abstract: This study examines the effect of shocks observed in financial markets on output and employment during the Great Depression. We present three main findings. First, an adverse financial shock leads to a decline in the manufacturing sector's output and employment that peaks about 11 months afterward. Next, this shock has a much greater impact on the durables sector than the nondurables sector. Last, continuing financial market weakness in 1933 and 1934 may have restrained the recovery from the Great Depression. The findings suggest that financial market weakness contributed to the length and depth of the Great Depression, and that this occurred mainly through the investment channel. In addition, a counterfactual analysis using the estimates from the Great Depression suggests that the recent recession would have been less severe without the financial market disruptions in the fall of 2008.

Date: 2010
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DOI: 10.2202/1935-1690.2086

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