Re-examining the contributions of money and banking shocks to the U.S. Great Depression

Harold Cole and Lee Ohanian

No 270, Staff Report from Federal Reserve Bank of Minneapolis

Abstract: This paper quantitatively evaluates the hypothesis that deflation can account for much of the Great Depression (1929?33). We examine two popular explanations of the Depression: (1) The ?high wage? story, according to which deflation, combined with imperfectly flexible wages, raised real wages and reduced employment and output. (2) The ?bank failure? story, according to which deflationary money shocks contributed to bank failures and to a reduction in the efficiency of financial intermediation, which in turn reduced lending and output. We evaluate these stories using general equilibrium business cycle models, and find that wage shocks and banking shocks account for a small fraction of the Great Depression. We also find that some other predictions of the theories are at variance with the data.

Keywords: Monetary policy; Depressions; Deflation (Finance); Banks and banking (search for similar items in EconPapers)
Date: 2000
New Economics Papers: this item is included in nep-dge, nep-his and nep-mon
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Citations: View citations in EconPapers (38)

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Chapter: Re-Examining the Contributions of Money and Banking Shocks to the US Great Depression (2001)
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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedmsr:270

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