How Could Everyone Have Been so Wrong? Forecasting the Great Depression with the Railroads

31 Pages Posted: 21 Jun 2002 Last revised: 27 Oct 2010

See all articles by John Landon-Lane

John Landon-Lane

Rutgers University, New Brunswick/Piscataway - Faculty of Arts and Sciences-New Brunswick/Piscataway - Department of Economics

Eugene N. White

Rutgers University - Department of Economics; National Bureau of Economic Research (NBER)

Adam Klug

affiliation not provided to SSRN

Date Written: June 2002

Abstract

Contemporary observers viewed the recession that began in the summer of 1929 as nothing extraordinary. Recent analyses have shown that the subsequent large deflation was econometrically forecastable, implying that a driving force in the depression was the high expected real interest rates faced by business. Using a neglected data set of forecasts by railroad shippers, we find that business was surprised by the magnitude of the great depression. We show that an ARIMA or Holt-Winters model of railroad shipments would have produced much smaller forecast errors than those indicated by the surveys. The depth and duration of the depression was beyond the experience of business, which appears to have believed that recovery would happen quickly as in previous recessions. This failure to anticipate the collapse of the economy suggests roles for both high real rates of interest and a debt deflation in the propagation of the depression.

Suggested Citation

Landon-Lane, John and White, Eugene Nelson and Klug, Adam, How Could Everyone Have Been so Wrong? Forecasting the Great Depression with the Railroads (June 2002). NBER Working Paper No. w9011, Available at SSRN: https://ssrn.com/abstract=316790

John Landon-Lane

Rutgers University, New Brunswick/Piscataway - Faculty of Arts and Sciences-New Brunswick/Piscataway - Department of Economics ( email )

75 Hamilton Street
New Brunswick, NJ 08901
United States

Eugene Nelson White (Contact Author)

Rutgers University - Department of Economics ( email )

75 Hamilton Street
New Brunswick, NJ 08901
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Adam Klug

affiliation not provided to SSRN

No Address Available

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