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The Great Depression and the Great Recession: A View from Financial Markets

Francesco Bianchi

NBER Working Paper No. 21056
Issued in March 2015, Revised in December 2018
NBER Program(s):The Asset Pricing Program, The Economic Fluctuations and Growth Program, The Monetary Economics Program

Similarities between the Great Depression and the Great Recession are documented with respect to the behavior of financial markets. A Great Depression regime is identified by using a Markov-switching VAR. The probability of this regime has remained close to zero for many decades, but spiked for a short period during the most recent financial crisis, the Great Recession. The Great Depression regime implies a collapse of the stock market, with small-growth stocks outperforming small-value stocks. A model with financial frictions and uncertainty about policy makers’ intervention suggests that policy intervention during the Great Recession might have avoided a second Great Depression. A multi-country analysis shows that the Great Depression and Great Recession were not like any other financial crises.

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Document Object Identifier (DOI): 10.3386/w21056

Published: Francesco Bianchi, 2019. "The Great Depression and the Great Recession: A View from Financial Markets," Journal of Monetary Economics, .

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