Working Paper: CEPR ID: DP15287
Authors: Victor Degorce; Eric Monnet
Abstract: Facing the Great Depression, Keynes blamed the detrimental consequences of precautionary savings on growth (paradox of thrift). Yet, the magnitude, forms and effects of savings accumulation remain unexplored in studies on the international economic crash of the 1930s. Based on new data for 22 countries, we document that the Great Depression was associated with a large international increase in savings institutions’ deposits. Banking crises spurred precautionary savings. Panel estimations show a negative conditional correlation between real GDP and deposits in savings institutions when a banking crisis hit. A back-of-the-envelope calculation suggests that the negative effect of precautionary savings on growth was at least as large as the direct effect of the decline in banking activity. The evolution of the saving rate began to reverse as countries left the gold standard.
Keywords: Great Depression; Banking Crises; Precautionary Savings; Paradox of Thrift; Savings Banks
JEL Codes: B22; E21; E51; G01; G21; N1; N2
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| banking crises (G01) | precautionary savings (D14) |
| precautionary savings (D14) | real GDP (E20) |
| banking crises (G01) | real GDP (E20) |
| precautionary savings (D14) | decline in output (E23) |
| banking crises (G01) | negative correlation with savings (E21) |
| uncertainty during banking crises (F65) | precautionary savings (D14) |