The Causes of the Great Depression Flashcards
Bordo et al 2000
Nominal rigidities - 2/3 of firms did not adjust nominal wages from late 1929 to late 1931. Rigidities worsen monetary shock. Deflation pushes up real wages and means production is/remains lower.
Claim - sticky wages were a significant channel of the monetary shock, which in their model accounted for ~60% of the decline in real GNP at the GD’s trough. Monetary shocks also account for 75% of fluctuation in real wages and labour hours.
Higher real wages, and lower production, in countries keeping the GS. GS also tightens monetary policy, inducing sharper price declines. Employment remains persistently sub-optimal.
NIRA in the US interfered, pushing nominal wage schedules and industry minimums etc. Intentions to boost purchasing power did not work.
Ohanian 2009
Argues the key failure was in the labour market, with excess labour supply. Defining feature of the GD; 20% lower hours worked over the 1930s.
Hoover - advised industries not to cut wages, encouraging increases and work sharing (fewer hours pw). In returns for curbing union power. Thought high wages were good, and cutthroat competition bad.
1929 to 1931, real average (manufacturing) wages up 10%, but hours down 40%. Industry accounted for 28% of unemployment in the period. Agriculture was a similarly large industry, but instead had a 25% fall in rw, 1.5% increase in hours. Union wages rose 40% 1920-6, non union 6%
Jobseeker data indicates desired wages as much as 40% below the actual wage - clear distortion of the market.
Theory accounts for the gap in the monetary theory. If a monetary contraction is to create deflation, low spending, and the GD, we need to understand how a large and extended monetary non-neutrality exists, such that economic forces did not correct the depression. Claim is that enforced high wages account for this.
Christiano et al 2004
Provides evidence for the F-S hypothesis - if the Fed was more accommodative, more flexible money supply, more bailouts, crisis could have been avoided.
Views the GD as a consequence of the interaction of shocks to financial markets, labour markets, and the banking system. Initial contraction driven by a slowdown in 1929, driven by a high interest rate. Compounded by an r spike in 1931 in response to GB leaving the GS, threatening a run on the dollar.
Liquidity preference shock - hh accumulate currency at the expense of deposits, taking money out of the system which would otherwise back up credit. Leads to a decline in investment and economic slowdown. Accelerator effect means lower spending on capital reduces the price of capital and so asset values, accompanied by a fall in the return to capital due to low demand. LPS implies increased rates is appropriate, but low spending/AD implies decreasing them. LPS so important because interest rates cannot fully solve it.
Data finds that variation in manufacturing output follows variation in monetary growth closely, while there is little relation between real wages and output/employment (sticky wages not the issue). Also, when real manufacturing wages are normalised to the industry, they are only ~5% higher in 1933 than 1929. Model indicates if rates/MP responded to variation in LP, the GD would be weaker.
Calomiris and Mason 2003
Bank distress magnified the decline in the GD.
F-S argue that the key was a contraction in the money multiplier, driven by deposit withdrawals and LP - contraction in money supply, reducing circulation.
Bernanke (and Fisher) - transmission occurred through borrower balance sheets and lack of bank credit. Deflation cut borrower asset values, making them less eligible for credit (whilst existing liabilities rose in real terms). Hence positive NPV borrowers rejected, driving a contraction in capital stocks and supply, and inefficient capital allocation. AD shock becomes an AS shock. Can a decline in (effective) demand for credit be distinguished from a decline in supply?
Evidence: forecasters of bank distress, like depreciation in asset values, instrument for loan supply and are uncorrelated with loan demand. Variation in loan supply has significant explanatory power over state income (and nationally).
Mazumder and Wood 2013
The deflation contributing the GD was inevitable, given the resumption of the GS at pre-war parity, despite wartime inflation. Under GS parity, these prices did not “make sense”, and would only once deflation occurred. The GS may be a sufficient cause of the GD, or made it inevitable.
Prices should be mean-reverting once money supply is controlled for, but GS prevented this. Price levels rapidly approached pre-war levels when countries left the GS. Those who resumed at a devalued parity felt far less deflation.
GS parities increasingly hard to support, given drying up gold production and supply. Inflation was not purely monetary, since only 1/2 of the price level was explained by monetary changes. Contra F-S H, the Fed could not have prevented the fall in money and prices.
Temin 2008
Argues against Real Business Cycle analysis as a good tool of understanding depressions. It seeks to understand changes in output in terms of changes in TFP.
Standard story - GD as a two-part event. 1: initial downturn in US/GER due to domestic factors. 2: Contractions turned into GD from poor policy under the GS. F-S H: the Fed was inept, responding too strongly to GB departure in Sept 1931, but not strongly enough to internal liquidity drains. The GS and AD fluctuations are important to the GS. But RBCA models it as a supply/factor problem.
Cole and Ohanian 1999 models the GD as a capital factor shock. Predicts a 23% fall in output against the reality of 38%. Hardly accurate.
2002 - blame labour market frictions for distorting the equilibrium.
How can we account for the worldwide depression, given that countries’ TFP were often in growth/independent. Closed models are inappropriate.
Eichengreen and Irwin 2010
The enactment of trade barriers during the GD can be understood as a policy of last resort for countries otherwise restrained by a fixed exchange rate (ie the GS). Those who left early enacted few barriers (GB was a political exception), whilst those remaining needed to do something else to combat domestic unemployment - capital controls (effectively abandoning GS), or protectionism.
Leaving the GS resulted in depreciation, stronger BoP, and gold inflows. Enabled CB to cut rates and act as a lender. Temin 1993 associates the length and depth of the GD experience to how long they remained on GS.
Effect of WWI on EXR: gold exports impeded, link between gold and CB policy. Resuming at pre-war parity without managing inflation means there is a lower ratio of gold (value) to nominal transactions. US/FR hold 60% of the gold.
GS unable to withstand the shock of the GD - countries only willing to hold foreign currencies when convertibility at fixed rate was certain, so scramble out was possible (creating deflationary pressures).
Trigger: 1928, Fed tightens MP (slows growth/AD whilst AS grows), FR depreciates the franc and converts foreign reserves to gold.
Trade evidence: after GB left, many others (linked to £) left too. GER/other EU states enacted controls. Others enacted barriers. Import volumes fell far more for GS/capital control nations.
