Financial Intermediation and the Great Depression: A Multiple Equilibrium Interpretation

52 Pages Posted: 29 Aug 2000 Last revised: 30 Jul 2010

See all articles by Russell Cooper

Russell Cooper

University of Texas at Austin - Department of Economics; National Bureau of Economic Research (NBER)

João Ejarque

University of Essex - Department of Economics

Date Written: May 1995

Abstract

This paper explores the behavior of the U.S. economy during the interwar period from the perspective of a model in which the existence of non-convexities in the intermediation process gives rise to a multiplicity of equilibria. The resulting indeterminancy is resolved through a sunspot process which leads to endogenous fluctuations in aggregate economic activity. From this perspective, the Depression period is represented as a regime shift associated with a financial crisis. Our model economy has properties which are broadly consistent with observations over the interwar period. Contrary to observation, the model predicts a negative correlation of consumption and investment as well as a highly volatile capital stock. Our model of financial crisis reproduces many aspects of the Great Depression though the model predicts a much sharper fall in investment than is observed in the data. Modifications to our model (adding durable goods and a capacity utilization choice) do not overcome these deficiencies.

Suggested Citation

Cooper, Russell W. and Gil Ejarque, João Miguel, Financial Intermediation and the Great Depression: A Multiple Equilibrium Interpretation (May 1995). NBER Working Paper No. w5130. Available at SSRN: https://ssrn.com/abstract=225195

Russell W. Cooper (Contact Author)

University of Texas at Austin - Department of Economics ( email )

Austin, TX 78712
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

João Miguel Gil Ejarque

University of Essex - Department of Economics ( email )

Wivenhoe Park
Colchester CO4 3SQ
United Kingdom

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