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

Zurich IEER Working Paper No. 50

32 Pages Posted: 17 Oct 2000

See all articles by Albrecht Ritschl

Albrecht Ritschl

London School of Economics & Political Science (LSE) - Department of Economic History; Centre for Economic Policy Research (CEPR)

Ulrich Woitek

University of Zurich

Date Written: July 2000

Abstract

This paper recasts Temin's (1976) question of whether monetary forces caused the Great Depression in a modern time series framework. We evaluate the effects of monetary policy against nonmonetary alternatives in a Bayesian updating framework with time-varying parameters. The predictive power of monetary policy for output is very small for the early phase of the depression and breaks down almost entirely after 1931. During the propagation phase of 1930-31, monetary policy is able to forecast correctly at short time horizons put invariably predicts recovery at longer horizons. In contrast, nonmonetary leading indicators on residential construction and equipment investment have impressive predictive power. Recursive calculation of the impulse response functions exhibits remarkable structural instability and strong reactions to monetary regime changes during the depression, just as predicted by the Lucas (1976) critique.

JEL Classification: N12, E37, E47, C53

Suggested Citation

Ritschl, Albrecht and Woitek, Ulrich, Did Monetary Forces Cause the Great Depression? A Bayesian VAR Analysis for the U.S. Economy (July 2000). Zurich IEER Working Paper No. 50. Available at SSRN: https://ssrn.com/abstract=236017 or http://dx.doi.org/10.2139/ssrn.236017

Albrecht Ritschl (Contact Author)

London School of Economics & Political Science (LSE) - Department of Economic History ( email )

Houghton Street
London WC2A 2AE
United Kingdom

HOME PAGE: http://personal.lse.ac.uk/ritschl/

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Ulrich Woitek

University of Zurich ( email )

Zürichbergstrasse 14
CH-8032 Zurich
Switzerland

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