TY  - JOUR
AU  - Cooper,Russell
AU  - Ejarque,Joao
TI  - Financial Intermediation and The Great Depression: A Multiple Equilibrium Interpretation
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 5130
PY  - 1995
Y2  - May 1995
UR  - http://www.nber.org/papers/w5130
L1  - http://www.nber.org/papers/w5130.pdf
N1  - Author contact info:
Russell Cooper
Department of Economics
The Pennsylvania State University
611 Kern
State College, PA 16802
E-Mail: russellcoop@gmail.com

Joao Ejarque
Institute of Economics
University of Copenhagen
Studiestraede 6
1455 Copenhagen, DENMARK
E-Mail: Joao.Ejarque@econ.ku.dk
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 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.
ER  -