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


Ritschl, Albrecht; Woitek, Ulrich (2000). Did Monetary Forces Cause the Great Depression? A Bayesian VAR Analysis for the U.S. Economy. Working paper series / Institute for Empirical Research in Economics No. 50, University of Zurich.

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.

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.

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Additional indexing

Item Type:Working Paper
Communities & Collections:03 Faculty of Economics > Department of Economics
Dewey Decimal Classification:330 Economics
Language:English
Date:July 2000
Deposited On:20 Aug 2014 13:05
Last Modified:07 Dec 2017 10:05
Series Name:Working paper series / Institute for Empirical Research in Economics
ISSN:1424-0459
Free access at:Official URL. An embargo period may apply.
Official URL:http://www.econ.uzh.ch/static/workingpapers.php?id=50
Related URLs:http://www.econ.uzh.ch/wp.html

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