Year: 2000
Type: article
Abstract: This paper quantitatively evaluates the hypothesis that deflation can account for much of the Great Depression (1929-1933). 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.
Source: NBER Macroeconomics Annual
DOI: 10.1086/654415
Authors: Harold L. Cole, Lee E. Ohanian
Language: English
Domain: Social Sciences
Open Access status: bronze
OpenAlex ID: W2117353772