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http://ssrn.com/abstract=1172258
 
 

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Deflation and the International Great Depression: A Productivity Puzzle


Harold L. Cole


University of Pennsylvania - Department of Economics; National Bureau of Economic Research (NBER)

Lee E. Ohanian


University of California, Los Angeles (UCLA) - Department of Economics; National Bureau of Economic Research (NBER)

Ron Leung


Universite de Montreal

February 1, 2005


Abstract:     
This paper presents a dynamic, stochastic general equilibrium study of the causes of the international Great Depression. We use a fully articulated model to assess the relative contributions of deflation/monetary shocks, which are the most commonly cited shocks for the Depression, and productivity shocks. We find that productivity is the dominant shock, accounting for about 2/3 of the Depression, with the monetary shock accounting for about 1/3. The main reason deflation doesn't account for more of the Depression is because there is no systematic relationship between deflation and output during this period. Our finding that a persistent productivity shock is the key factor stands in contrast to the conventional view that a continuing sequence of unexpected deflation shocks was the major cause of the Depression. We also explore what factors might be causing the productivity shocks. We find some evidence that they are largely related to industrial activity, rather than agricultural activity, and that they are correlated with real exchange rates and non-deflationary shocks to the financial sector.

Keywords: Great Depression, Deflation, Productivity Shocks, Monetary Shocks

JEL Classification: E3, F4

working papers series


Not Available For Download

Date posted: July 24, 2008  

Suggested Citation

Cole, Harold L. and Ohanian, Lee E. and Leung, Ron, Deflation and the International Great Depression: A Productivity Puzzle (February 1, 2005). Available at SSRN: http://ssrn.com/abstract=1172258

Contact Information

Harold L. Cole (Contact Author)
University of Pennsylvania - Department of Economics ( email )
3718 Locust Walk
436 McNeil
Philadelphia, PA 19104
United States
215-898-7788 (Phone)
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
Lee E. Ohanian
University of California, Los Angeles (UCLA) - Department of Economics ( email )
Box 951477
8283 Bunch Hall
Los Angeles, CA 90095-1477
United States
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
Ron Leung
Universite de Montreal ( email )
C.P. 6128, succursale Centre-Ville
Montreal, Quebec H3C 3J7
Canada
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