Deflation and the International Great Depression: A Productivity Puzzle / Harold L. Cole, Lee E. Ohanian, Ron Leung.

Format:

Book

Author/Creator:

Cole, Harold L.

Contributor:

National Bureau of Economic Research.

Ohanian, Lee E.

Leung, Ron.

Series:

Working Paper Series (National Bureau of Economic Research) no. w11237.

NBER working paper series no. w11237

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Other Title:

Deflation and the International Great Depression

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2005.

Summary:

This paper develops the first dynamic, stochastic, general equilibrium analysis of the International Great Depression. We construct a new version of Lucas?s (1972) monetary misperceptions model, with a real shock (productivity) and a nominal shock (money supply). We use the model with a newly assembled panel data set from 17 countries between 1929-33 to quantify the fraction of output change and price change that is accounted for by these two shocks. Data limitations require us to develop a new procedure for identifying the two shocks. The identified productivity shock has a large country-specific component, and is highly correlated with actual productivity. The identified monetary shock has a large common component, and is highly correlated with money supply changes. We find that the model accounts for most of the variation in macroeconomic activity in the panel of countries. About 2/3 of output change is accounted for by the real (productivity) shock, and virtually all of the change in nominal prices is accounted for by the nominal (money supply) shock. The only variable we find that is highly correlated with the productivity shock is stock prices. We conclude that financial friction models are potentially the most promising class of models for understanding the Solow Residual during this period, and thus the Great Depression.

Notes:

Print version record

April 2005.