Staff Report 270

Re-Examining the Contributions of Money and Banking Shocks to the U.S. Great Depression

Lee E. Ohanian | Consultant
Harold L. Cole

Published June 1, 2000

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.

Published In: NBER Macroeconomics Annual 2000 (Vol. 15, 2001, pp. 183-227)

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