Working Paper: NBER ID: w9011
Authors: Adam Klug; John S. Landon-Lane; Eugene N. White
Abstract: Contemporary observers viewed the recession that began in the summer of 1929 as nothing extraordinary. Recent analyses have shown that the subsequent large deflation was econometrically forecastable, implying that a driving force in the depression was the high expected real interest rates faced by business. Using a neglected data set of forecasts by railroad shippers, we find that business was surprised by the magnitude of the great depression. We show that an ARIMA or Holt-Winters model of railroad shipments would have produced much smaller forecast errors than those indicated by the surveys. The depth and duration of the depression was beyond the experience of business, which appears to have believed that recovery would happen quickly as in previous recessions. This failure to anticipate the collapse of the economy suggests roles for both high real rates of interest and a debt deflation in the propagation of the depression.
Keywords: No keywords provided
JEL Codes: E30; N12
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| high expected real interest rates (E43) | forecasting errors of railroad shippers (L92) |
| debt deflation (E31) | forecasting errors of railroad shippers (L92) |
| incorrect forecasts of railroad shippers (L92) | actual economic outcomes during the Depression (N12) |
| misjudgment of economic recovery expectations (E32) | forecasting errors of railroad shippers (L92) |
| depth and duration of the Depression (N11) | forecasting errors of railroad shippers (L92) |