Working Paper: NBER ID: w16925
Authors: Gabriel P. Mathy; Christopher M. Meissner
Abstract: A large body of cross-country empirical evidence identifies monetary policy and trade integration as key determinants of business cycle co-movement. Partially consistent with this, many argue that the re-emergence of the gold standard allowed for the global transmission of a deflationary shock in 1929 that culminated in the Great Depression. It is puzzling then to see decreased co-movement between 1920 and 1927 when international integration increased and nations returned to the gold standard. Fixed exchange rates and global trade were also on the rise after 1932, but co-movement declined again. Our empirical results shows that exchange rate regimes and trade were associated with higher co-movement at the bilateral level while common shocks and exchange control policies also mattered. Much of the fall after 1932 was driven by the rise of smaller blocs of monetary and trade cooperation and an inter-bloc fall in co-movement.
Keywords: Great Depression; Trade; Exchange Rate Regimes; Output Comovement
JEL Codes: E32; E42; F42; N1; N12; N14
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| gold standard (E42) | international transmission of economic shocks during the Great Depression (F44) |
| gold standard (E42) | synchronized downturns in countries adhering to it (F44) |
| decline in comovement after 1932 (N12) | rise of smaller monetary and trade blocs (F15) |
| smaller monetary and trade blocs (F36) | reduced interbloc comovement (F29) |
| smaller monetary and trade blocs (F36) | higher intrabloc correlation (C10) |
| higher levels of bilateral trade and fixed exchange rates (F33) | increased comovement of industrial production between countries (F29) |