Financial Intermediation and The Great Depression: A Multiple Equilibrium Interpretation / Russell Cooper, Joao Ejarque.

Format:

Book

Author/Creator:

Cooper, Russell.

Contributor:

National Bureau of Economic Research.

Ejarque, Joao.

Series:

Working Paper Series (National Bureau of Economic Research) no. w5130.

NBER working paper series no. w5130

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Other Title:

Financial Intermediation and The Great Depression

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 1995.

Summary:

This paper explores the behavior of the U.S. economy during the interwar period from the perspective of a model in which the existence of non-convexities in the intermediation process gives rise to a multiplicity of equilibria. The resulting indeterminancy is resolved through a sunspot process which leads to endogenous fluctuations in aggregate economic activity. From this perspective, the Depression period is represented as a regime shift associated with a financial crisis. Our model economy has properties which are broadly consistent with observations over the interwar period. Contrary to observation, the model predicts a negative correlation of consumption and investment as well as a highly volatile capital stock. Our model of financial crisis reproduces many aspects of the Great Depression though the model predicts a much sharper fall in investment than is observed in the data. Modifications to our model (adding durable goods and a capacity utilization choice) do not overcome these deficiencies.

Notes:

Print version record

May 1995.