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How much did uncertainty shocks matter in the Great Depression?

Gabriel P. Mathy ()
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Gabriel P. Mathy: American University

Cliometrica, 2020, vol. 14, issue 2, No 3, 283-323

Abstract: Abstract The USA in the 1930s experienced unprecedented uncertainty. Uncertainty shocks buffeted the economy during recessionary periods, but these shocks receded during the recovery periods of the Great Depression. Using vector autoregressions on monthly data for 1919–1941, I show that a one standard deviation increase in uncertainty decreased investment, GDP, industrial output, employment, hours worked, wages, and the price level. I perform a historical decomposition simulation to see how much uncertainty shocks mattered for explaining movements in major variables during the Depression. Roughly 40–70% of the simulated decline in output can be explained by uncertainty shocks in the Great Depression.

Keywords: Uncertainty shocks; Great Depression; Historical decomposition (search for similar items in EconPapers)
JEL-codes: D80 E32 N12 (search for similar items in EconPapers)
Date: 2020
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DOI: 10.1007/s11698-019-00190-1

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