Deflation and the International Great Depression: A Productivity Puzzle

Posted: 24 Jul 2008  

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

Multiple version iconThere are 2 versions of this paper

Date Written: 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

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: https://ssrn.com/abstract=1172258

Harold L. Cole (Contact Author)

University of Pennsylvania - Department of Economics ( email )

3718 Locust Walk
436 McNeil
Philadelphia, PA 19104
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215-898-7788 (Phone)

National Bureau of Economic Research (NBER)

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Cambridge, MA 02138
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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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