TY - JOUR AU - Cole,Harold L. AU - Ohanian,Lee E. AU - Leung,Ron TI - Deflation and the International Great Depression: A Productivity Puzzle JF - National Bureau of Economic Research Working Paper Series VL - No. 11237 PY - 2005 Y2 - April 2005 UR - http://www.nber.org/papers/w11237 L1 - http://www.nber.org/papers/w11237.pdf N1 - Author contact info: Harold L. Cole Economics Department University of Pennsylvania 3718 Locust Walk 160 McNeil Building Philadelphia, PA 19104 Tel: 215-898-7788 E-Mail: colehl@sas.upenn.edu Lee E. Ohanian 8283 Bunche Hall UCLA, Department of Economics Box 951477 Los Angeles, CA 90095 Tel: 310/825-0979 Fax: 310/825-9528 E-Mail: ohanian@econ.ucla.edu Ron Leung Department of Economics University of Minnesota 271 19th Avenue South Minneapolis, MN 55455 E-Mail: rkhleung@econ.umn.edu AB - This paper develops the first dynamic, stochastic, general equilibrium analysis of the International Great Depression. We construct a new version of Lucas?s (1972) monetary misperceptions model, with a real shock (productivity) and a nominal shock (money supply). We use the model with a newly assembled panel data set from 17 countries between 1929-33 to quantify the fraction of output change and price change that is accounted for by these two shocks. Data limitations require us to develop a new procedure for identifying the two shocks. The identified productivity shock has a large country-specific component, and is highly correlated with actual productivity. The identified monetary shock has a large common component, and is highly correlated with money supply changes. We find that the model accounts for most of the variation in macroeconomic activity in the panel of countries. About 2/3 of output change is accounted for by the real (productivity) shock, and virtually all of the change in nominal prices is accounted for by the nominal (money supply) shock. The only variable we find that is highly correlated with the productivity shock is stock prices. We conclude that financial friction models are potentially the most promising class of models for understanding the Solow Residual during this period, and thus the Great Depression. ER -