TY - JOUR
T1 - Financial intermediation and the Great Depression
T2 - a multiple equilibrium interpretation
AU - Cooper, Russell
AU - Ejarque, João
N1 - Funding Information:
*We are grateful to Paul Beaudry, Ben Bernanke, Simon Gilchrist, John Haltiwanger, Robert King, Charles Plosser, Sergio Rebelo, and Steve Williamson for discussions on this topic, to Alok Johri for help with the data, and to the National Science Foundation and JNICT for financial support. Seminar participants at the November 1994 Carnegie-Rochester Conference, the Innocenzo Gasparina Institute for Economic Research, the University of Bologna, the Universite du Quebec-Montreal, and the Texas Monetary Conference provided numerous questions that helped to improve this paper. t Correspondence to: Russell Cooper, Department of Economics, Boston University, Boston, MA 02215 0167-2231/95/$09. 5 0 fie 1995 SSDI 0167-2231(95)00048-5
PY - 1995/12
Y1 - 1995/12
N2 - This paper explores the behavior of the U.S. economy during the interwar period from the perspective of a model in which the existence of nonconvexities in the intermediation process gives rise to a multiplicity of equilibria. The resulting indeterminacy is resolved through a sunspot process which leads to endogenous fluctuations in aggregate economic activity. From this perspective, the Depression period is represented as a regime shift associated with a financial crisis. Our model economy has properties which are broadly consistent with observations over the interwar period. Contrary to observation, the model predicts a negative correlation of consumption and investment as well as a highly volatile capital stock. Our model of financial crisis reproduces many aspects of the Great Depression, though the model predicts a much sharper fall in investment than is observed in the data. Modifications to our model (adding durable goods and a capacity utilization choice) do not overcome these deficiencies.
AB - This paper explores the behavior of the U.S. economy during the interwar period from the perspective of a model in which the existence of nonconvexities in the intermediation process gives rise to a multiplicity of equilibria. The resulting indeterminacy is resolved through a sunspot process which leads to endogenous fluctuations in aggregate economic activity. From this perspective, the Depression period is represented as a regime shift associated with a financial crisis. Our model economy has properties which are broadly consistent with observations over the interwar period. Contrary to observation, the model predicts a negative correlation of consumption and investment as well as a highly volatile capital stock. Our model of financial crisis reproduces many aspects of the Great Depression, though the model predicts a much sharper fall in investment than is observed in the data. Modifications to our model (adding durable goods and a capacity utilization choice) do not overcome these deficiencies.
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U2 - 10.1016/0167-2231(95)90053-5
DO - 10.1016/0167-2231(95)90053-5
M3 - Article
AN - SCOPUS:0002837506
SN - 0167-2231
VL - 43
SP - 285
EP - 323
JO - Carnegie-Rochester Confer. Series on Public Policy
JF - Carnegie-Rochester Confer. Series on Public Policy
IS - C
ER -