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Contribution Details

Type Working Paper
Scope Discipline-based scholarship
Title Did Monetary Forces Cause the Great Depression? A Bayesian VAR Analysis for the U.S. Economy
Organization Unit
  • Albrecht Ritschl
  • Ulrich Woitek
  • English
Institution University of Zurich
Series Name Working paper series / Institute for Empirical Research in Economics
Number No. 50
ISSN 1424-0459
Date 2000
Abstract Text 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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