Technology, Credit and Confidence during the Roaring Twenties

Sharon Harrison and Mark Weder

No 901, Working Papers from Barnard College, Department of Economics

Abstract: We compare and contrast alternative explanations of the Roaring Twenties. Starting with the RBC model as a benchmark, we also examine a model with indeterminacy and self-fulfilling expectations (SFE), and one with credit shocks. Historical and anecdotal evidence provides support for each of these set-ups. We use US data from 1889-1953 to estimate each of the relevant shocks, and the resulting model-driven output. Our results indicate that all three models replicate well the experience of the 1920s. We then estimate "horserace" regressions, which provide evidence of the explanatory power of each model above and beyond the others. Here the SFE model emerges as the winner, leading us to conclude that self-fulfilling confidence was the primary driving force behind the Roaring Twenties.

Keywords: Sunspots; Indeterminacy; Credit Shocks; Roaring Twenties (search for similar items in EconPapers)
JEL-codes: E32 N12 (search for similar items in EconPapers)
Pages: 30 pages
Date: 2007-12
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