AMER.MACRO: Did Monetary Forces Cause Great Depression? A Bayesian

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                 ABSTRACTS IN ECONOMIC HISTORY
                      (c) 2000 EH.Net
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Name: Albrecht Ritschl
Email: ritschl@iew.unizh.ch
Institution: University of Zurich, Switzerland

Co-author: Ulrich Woitek, University of Glasgow, United Kingdom

Title: Did Monetary Forces Cause the Great Depression? A Bayesian
VAR Analysis for the U.S. Economy

Internet Address of abstracted work:
http://papers.ssrn.com/paper.taf?ABSTRACT_ID=236017

By mail:
Albrecht Ritschl
IEW, University of Zurich
Raemistrasse 64
Ch-8001 Zurich / Switzerland

Language: English

Abstract:

This paper recasts Temin's (1976) question of whether monetary forces
caused the Great Depression in a modern time series framework. We
analyze money-income causalities and predict U.S. output in a
recursive Bayesian framework, allowing for information updating and
time-varying coefficients. The predictive power of money aggregates
and the Fed discount rate is in general very weak and collapses after
the crisis of the gold standard in 1931. In contrast, non-monetary
variables, particularly leading indicators of residential
construction and equipment investment, have impressive forecasting
power, forecasting almost half the output decline already in
mid-1929. Our recursive framework also allows us to examine the
stability of our estimated dynamic parameters. Recursive estimates of
the monetary impulse responses exhibit remarkable structural
instability and strongly react to monetary regime changes during the
depression. This phenomenon is discomforting in the light of the
Lucas (1976) critique, as it suggests that the money/income
relationship may be endogenous to policy and was not in the set of
deep parameters of the U.S. economy. Given the instability and poor
predictive power of monetary instruments and the strong showing of
leading indicators of real activity, we remain skeptical about a
monetary interpretation of the Great Depression in the U.S.

Bibliography: Ritschl, Albrecht and Ulrich Woitek. "Did Monetary
Forces Cause the Great Depression? A Bayesian VAR Analysis for the
U.S. Economy." Working paper, December, 2000.

Subject: H
Geographical Area: 7
Country/Region: United States
Time Period: 8

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