Working Paper: CEPR ID: DP7610
Authors: Albrecht Ritschl; Samad Sarferaz
Abstract: This paper examines the role of currency and banking in the German financial crisis of 1931 for both Germany and the U.S. We specify a structural dynamic factor model to identify financial and monetary factors separately for each of the two economies. We find that monetary transmission through the Gold Standard played only a minor role in causing and propagating the crisis, while financial distress was important. We also find evidence of crisis propagation from Germany to the U.S. via the banking channel. Banking distress in both economies was apparently not endogenous to output or monetary policy. Results confirm Bernanke's (1983) conjecture that an independent, non-monetary financial channel of crisis propagation was operative in the Great Depression.
Keywords: 1931 financial crisis; banking; bayesian factor analysis; currency; great depression; international business cycle transmission
JEL Codes: C53; E37; E47; N12; N13
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| monetary transmission through the gold standard (E42) | crisis causation (H12) |
| financial distress (G33) | crisis causation (H12) |
| banking distress in Germany (F65) | crisis propagation to the US (H12) |
| banking distress in the US (F65) | crisis propagation from Germany to the US (H12) |
| financial factors (G29) | international crisis propagation (F51) |
| monetary forces (E49) | international crisis propagation (F51) |
| financial conditions in Germany (E66) | deepening US recession (F44) |
| Germany's financial factor (N24) | US economy (O51) |