NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Financial Intermediation and The Great Depression: A Multiple Equilibrium Interpretation

Russell Cooper, Joao Ejarque

NBER Working Paper No. 5130
Issued in May 1995
NBER Program(s):   EFG

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 non-convexities in the intermediation process gives rise to a multiplicity of equilibria. The resulting indeterminancy 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.

download in pdf format
   (1079 K)

email paper

This paper is available as PDF (1079 K) or via email.

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w5130

Published: Carnegie-Rochester Conference Series on Public Policy, Vol 43 (1995), pp. 285-323.

Users who downloaded this paper also downloaded these:
Bernanke w1054 Non-Monetary Effects of the Financial Crisis in the Propagation of the Great Depression
Cooper and Corbae w6094 Financial Fragility and the Great Depression
Bernanke, Gertler, and Gilchrist w6455 The Financial Accelerator in a Quantitative Business Cycle Framework
 
Publications
Activities
Meetings
Data
People
About

Support
National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email: info@nber.org

Contact Us