Depression Econometrics: A Favar Model of Monetary Policy During the Great Depression

67 Pages Posted: 18 Jan 2010

See all articles by Pooyan Amir-Ahmadi

Pooyan Amir-Ahmadi

University of Illinois at Urbana-Champaign - Department of Economics

Albrecht Ritschl

London School of Economics & Political Science (LSE) - Department of Economic History; Centre for Economic Policy Research (CEPR)

Date Written: November 2009

Abstract

The prominent role of monetary policy in the U.S. interwar depression has been conventional wisdom since Friedman and Schwartz [1963]. This paper presents evidence on both the surprise and the systematic components of monetary policy between 1929 and 1933. Doubts surrounding GDP estimates for the 1920s would call into question conventional VAR techniques. We therefore adopt the FAVAR methodology of Bernanke, Boivin, and Eliasz [2005], aggregating a large number of time series into a few factors and inserting these into a monetary policy VAR. We work in a Bayesian framework and apply MCMC methods to obtain the posteriors. Employing the generalized sign restriction approach toward identification of Amir Ahmadi and Uhlig [2008], we find the effects of monetary policy shocks to have been moderate. To analyze the systematic policy component, we back out the monetary policy reaction function and its response to aggregate supply and demand shocks. Results broadly confirm the Friedman/Schwartz view about restrictive monetary policy, but indicate only moderate effects. We further analyze systematic policy through conditional forecasts of key time series at critical junctures, taken with and without the policy instrument. Effects are again quite moderate. Our results caution against a predominantly monetary interpretation of the Great Depression.

Keywords: Bayesian FAVAR, Dynamic Factor Model, Friedman Schwartz Hypothesis, Great Depression, Monetary policy

JEL Classification: C11, C53, E37, E47, E52, N12

Suggested Citation

Amir-Ahmadi, Pooyan and Ritschl, Albrecht, Depression Econometrics: A Favar Model of Monetary Policy During the Great Depression (November 2009). CEPR Discussion Paper No. DP7546, Available at SSRN: https://ssrn.com/abstract=1536336

Pooyan Amir-Ahmadi (Contact Author)

University of Illinois at Urbana-Champaign - Department of Economics ( email )

410 David Kinley Hall
1407 W. Gregory
Urbana, IL 61801
United States

Albrecht Ritschl

London School of Economics & Political Science (LSE) - Department of Economic History ( email )

Houghton Street
London WC2A 2AE
United Kingdom

HOME PAGE: http://personal.lse.ac.uk/ritschl/

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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