Nonmonetary Effects of the Financial Crisis in the Great Depression

Posted: 22 Aug 2001

See all articles by Ali Anari

Ali Anari

Texas A&M University - Mays Business School

James W. Kolari

Texas A&M University - Department of Finance

Abstract

The credit hypothesis maintains that nonmonetary factors worsen declines in output during severe economic contractions, which has been a prominent rationale for stringent bank regulation. We apply recent advances in time series analysis to re-examine the role of U.S. bank failures in the Great Depression. In brief, month-by-month decompositions of output, prices, money supply, the liabilities of failed firms, and the deposits of failed banks indicate that bank failures did not initiate the fall in output and prices. However, chronic bank failure over at least a two year period of time in combination with a surge in failures in the latter part of this period of banking industry distress had large negative effects on all of the variables under study. We conclude that chronic bank failures coupled with subsequent threshold failure effects can have deep and pervasive influences on the economy, which justifies government intervention at such times.

Keywords: Bank failure, economic output, Great Depression

JEL Classification: E44, G21, N22

Suggested Citation

Anari, Ali and Kolari, James W., Nonmonetary Effects of the Financial Crisis in the Great Depression. Journal of Economics and Business, Vol. 51, pp. 215-236, May/June 1999. Available at SSRN: https://ssrn.com/abstract=275202

Ali Anari

Texas A&M University - Mays Business School ( email )

Wehner 401Q, MS 4353
College Station, TX 77843-4218
United States
979-845-2094 (Phone)
979-845-0460 (Fax)

James W. Kolari (Contact Author)

Texas A&M University - Department of Finance ( email )

MS-4218
Department of Finance
College Station, TX TX 77843-4218
United States
979-845-4803 (Phone)
979-845-3884 (Fax)

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