Department of Economics
University of Minnesota
271 19th Avenue South
Minneapolis, MN 55455
NBER Working Papers and Publications
|April 2005||Deflation and the International Great Depression: A Productivity Puzzle|
with Harold L. Cole, Lee E. Ohanian: w11237
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 mode...