Week 3 - The Great Depression All of IT

Question 1

Provide a striking figure on the Great Depression

Answer 1

Unemployment rate peaked at 25% and
stayed in double digits (Bordo, Goldin and White
(1998))

Question 2

What were the main ‘buckets’ to explain the Great Depression

Answer 2

Monetary Hypothesis - Contraction in money supply
Spending Hypothesis - Contraction in AD
Non-Monetary Hypothesis - Factors unrelated to the money supply

Question 3

Which papers focus on which motivation for the Great Depression?

Answer 3

Spending Hypothesis - Romer (1990) and Temin (1976)

Question 4

What are the required readings for What Caused Great Depression?

Answer 4

1. Bernanke (1983) - Credit Intermediation
2. Richardson and Troost (2009)
3. Marodin et al (2024)
4. Wolf (2013) - Europe

Question 5

For Romer (1990) what is:
The main argument
The empirical design
The results
The interpretation

Answer 5

Argument – Argues uncertainty hypothesis
- The extreme stock price variability made consumers concerned about future income
- This made consumers postpone spending on durable goods
- The uncertainty increased the value of waiting so consumers delayed spending on durable good
- Even those who were not the 8% who held stock were impacted.
Research design – Stock Market Variability
- Dataset from Federal Reserve Board department and grocery sales.
- They show descriptive statistics on the change in each of these variables
- Use stock market volatility as an explanator for change in durable consumption
Results
- Consumption of durable goods dropped by 32.3% in 1930
- Perishable goods only dropped by 1.6%
- In the model stock market volatility coefficient 66% positive significant (For every unit increase of stock volatility)
- No significant effect on food
Interpretations
- Challenges the view that the crash had minimal impact on the depression
- Insight why output collapsed before monetary factors
- Highlights the importance of psychological shocks on consumption
Research design – Stock Market Variability
- Dataset from Federal Reserve Board department and grocery sales.
- They show descriptive statistics on the change in each of these variables
- Use stock market volatility as an explanator for change in durable consumption
Results
- Consumption of durable goods dropped by 32.3% in 1930
- Perishable goods only dropped by 1.6%
- In the model stock market volatility coefficient 66% positive significant (For every unit increase of stock volatility)
- No significant effect on food
Interpretations
- Challenges the view that the crash had minimal impact on the depression
- Insight why output collapsed before monetary factors
- Highlights the importance of psychological shocks on consumptionq

Question 6

For Temin (1976)
The main argument
The empirical design
The results
The interpretation

Answer 6

Temin (1976)
Argument – challenges monetarist view
- Households cut spending as the debt burden increased after the crash
- Suggests that the depression was caused by a fall in AD
Research Design – Theoretical and anecdotal
- Looks at key data and speaks about historical factors
Results/ Interpretation –
- Argues that demand side failures are to blame
- Asset prices fell, debt stayed the same, this increased burden of debt so cut spending

Question 7

For Bernanke (1983)
The main argument
The empirical design
The results
The interpretation

Answer 7

Bernanke (1983)
Argument – Credit
- The financial crisis (1930-1933), disrupted cost of credit intermediation. This then decreased overall lending, lending is important for investment so then it decreased AD.
Research Design:
- Theoretical method, when banks fail it increases CCI
- Reviews financial breakdown and then cites dramatic reduction in lending
- Regression using CCI in it, this increases the explanatory power considerably
o Uses time series model form 1919-1941
o First, looks at how just monetary factors impact output
o Second, adds non-monetary factors and increases the explanatory factors
o Coefficient on DBANKS and DFAILS is statistically negative significant on industrial output. sss
Results:
- Adding non-monetary impacts increases considerably the explanatory power
Interpretation
- The crisis was not just caused by a lack of money it was a friction in the market.

Question 8

For Richardson and Troost (2009)
The main argument
The empirical design
The results
The interpretation

Answer 8

Focus:
- Did Federal Reserve Policy differences during the Great Depression impact bank survival, credit availability and economic activity.
Research Design:
- Natural experiment in the state of Mississippi. One state but was split into two fed districts:
o Northern Counties were run by the St Louis Fed
o Southern Counties were run by the Atlanta Fed
- Therefore, all else was held constant
o Atlanta held expansionary monetary policy
o St Louis did not intervene and let banks fail

Data: Use a range of data from Federal Reserve Boards and also newspapers at the time

• Model:
• Log-logistic survival model with the outcome variable being how many days the bank survived for
• Then use a dummy variable for the Atlanta region

Question 9

For Marodin et al (2024)
The main argument
The empirical design
The results
The interpretation

Answer 9

Marodin et al (2024)

Research focus: did banking panics cause the contraction in the money supply?
Use district level variation to work out
Finding caused about ⅔ of the contraction 1929-1933

Empirical design:

They exploit that the Fed had 12 regional banks, each creating money locally using a fixed effects model
Panics happened in some districts and not in other

Results:

Panics explain around 27% of the fall in money supply between 1929 and 1933
For an additional bank panic episode multiplier fell from 0.3

Interpretation:
The drop was not caused by the policy, but rather the behaviour.

Question 10

For Calomiris and Mason (2003)
The main argument
The empirical design
The results
The interpretation

Answer 10

• Focus look at to what extent ex-ante position of banks or panic induced bank failures
  Empirical design:
• Use 7,000 federal reserve boards
• Build survival models for how long a bank survives before it fails
  Results:
• Banks that were smaller, held lower quality assets and more leveraged were more likely to fail.
• However, in 1933 panic also had a large role in explaining the failures.
  Interpretation
• Contrary to Friedman and Schwartz panic was less important than believed and it was actually the ex-ante balance sheets that had an impact
• A 1 percentage point decrease in the capital-to-asset ratio increased the hazard of failure by 3.2%.

Question 11

For Wolf (2013)
The main argument
The empirical design
The results
The interpretation

Answer 11

Research focus:
- Tells a story of why Europe’s crisis lasted longer: countries were not able to coordinate and led to a fragmented and suboptimal response.
Research Method:
- Historical case studies: UK, France, Germany
o Uses Creditanstalt failure 1931
40% of EU loans flowed through the bank
- Statistical model on which countries left the Gold Standard, Early vs Late.
o Uses a survival model measuring how long countries lasted before dropping the gold standard – Looks at 27 countries
 Low gold reserves countries exited earlier
 High deflation increased the chance of exit
 Banking crisis pushed countries towards exit
 Consequently, it showed further that countries were trapped to leave the gold standard
Results / Overall Interpretation
- Europe recovered from the depression slower not because it did not have solutions, but because it failed to act collectively

Question 12

From Eichengreen and Irwin (2010)
The main argument
The empirical design
The results
The interpretation

Answer 12

Research focus:
- Why did some countries turn to protectionist policies during the depression while others didn’t?
- Argue that protectionism wasn’t just unavoidable
Research design:
- Cross-Country panel of 40 countries between 1928 and 1935

Look at how a devaluation of exchange rate caused a change in the tariff
Result:
- Countries on gold standard more likely to raise tariffs
- Autocracies more likely to raise tariffs
Interpretation:
- Protectionism was not just an automatic reaction to the Depression it depended on the Macro dynamics in that area at the time

Question 13

What did White (1990) find

Answer 13

Found some evidence that stock prices moved with dividends
But also said it was a general floor of investor sentiment

Question 14

What did Rappoport and White (1993) find?

Answer 14

Interest rates on brokers loans

Question 15

What did Olney (2013) say

Answer 15

• Households had a lot of debt

Question 16

What did Bierman (2013) say

Answer 16

ATH 380 dlrs Sep

Question 17

What are some striking figures to introduce the Great Depression?

Answer 17

Romer (1993) - Industrial production fell by 48%
Bordo et al (1998) - Unemployment rose to 25%
Bordo et al (1998) - Real GNP fell by 29%

Question 19

What was monetary policy in the Great Depression?

Answer 19

• The money supply shrank 30%
• The FED let banks fail did not act as lender of last resort
• The FED did not lower interest rates as it was on the gold standard

Question 20

What did Friedman and Schwartz (1963) say about the depression?

Answer 20

• Friedman and Schwartz (1963) show that between 1929 and 1931 the money supply contracted by 35.2%
• 9,000+ banks failed and the Fed did not act as a lender of last resort
• The gold standard made it worse as they actually increased interest rates
• Open market purchases came too late, they bought 1$ billion of bonds in 1932 and this helped the situation
• Banks failed and the FED stood aside
• They did not expand the money supply even if they had the tools to
• They defended the gold standard not the economy

Question 21

What was the turning point in the Recovery?

Answer 21

Roosevelt got elected in 1932
Departure from gold standard in 1933