Financial Market Shocks during the Great Depression

29 Pages Posted: 10 Aug 2009 Last revised: 9 Oct 2013

See all articles by Alycia Chin

Alycia Chin

Public Company Accounting Oversight Board

Missaka Warusawitharana

Board of Governors of the Federal Reserve System

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Date Written: July 7, 2010

Abstract

This study examines the effect of shocks observed in financial markets on output and employment during the Great Depression. We present three main findings. First, an adverse financial shock leads to a decline in manufacturing sector output and employment that peaks about 11 months afterward. Next, this shock has a much greater impact on the durables sector than the nondurables sector. Last, continuing financial market weakness in 1933 and 1934 may have restrained the recovery from the Great Depression. The findings suggest that financial market weakness contributed to the length and depth of the Great Depression, and that this occurred mainly through the investment channel. In addition, a counterfactual analysis using the estimates from the Great Depression suggests that the recent recession would have been less severe absent the financial market disruptions in the fall of 2008.

Keywords: Great Depression, Financial markets

JEL Classification: E44, N12

Suggested Citation

Chin, Alycia and Warusawitharana, Missaka, Financial Market Shocks during the Great Depression (July 7, 2010). Available at SSRN: https://ssrn.com/abstract=1445407 or http://dx.doi.org/10.2139/ssrn.1445407

Alycia Chin

Public Company Accounting Oversight Board ( email )

1666 K Street, NW
Washington, DC 20006-2
United States

Missaka Warusawitharana (Contact Author)

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

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