Working Paper: NBER ID: w4814
Authors: Ben S. Bernanke
Abstract: Recently, research on the causes of the Great Depression has shifted from a heavy emphasis on events in the United States to a broader, more comparative approach that examines the interwar experiences of many countries simultaneously. In this lecture I survey the current state of our knowledge about the Depression from a comparative perspective. On the aggregate demand side of the economy, comparative analysis has greatly strengthened the empirical case for monetary shocks as a major driving force of the Depression; an interesting possibility suggested by this analysis is that the worldwide monetary collapse that began in 1931 may be interpreted as a jump from one Nash equilibrium to another. On the aggregate supply side, comparative empirical studies provide support for both induced financial crisis and sticky nominal wages as mechanisms by which nominal shocks had real effects. Still unresolved is why nominal wages did not adjust more quickly in the face of mass unemployment.
Keywords: Great Depression; Monetary Shocks; Comparative Analysis; Gold Standard
JEL Codes: E32; E44; N12
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| monetary shocks (E39) | aggregate demand (E00) |
| declines in money supply (E51) | aggregate demand (E00) |
| aggregate demand (E00) | economic contraction (F44) |
| monetary shocks (E39) | economic contraction (F44) |
| abandonment of the gold standard (F33) | quicker recovery from the Depression (N12) |
| deflation-induced financial crises (G01) | financial instability (F65) |
| sticky nominal wages (J31) | unemployment (J64) |