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Financial Fragility and the Great Depression

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  • Russell Cooper
  • Dean Corbae

Abstract

We analyze a financial collapse, such as the one which occurred during the Great Depression, from the perspective of a monetary model with multiple equilibria. The economy we consider contains financial fragility due to increasing returns to scale in the intermediation process. Intermediaries provide the link between savers and firms who require working capital for production. Fluctuations in the intermediation process are driven by variations in the confidence agents place in the financial system. Our model matches quite closely the qualitative movements in some financial and real variables (the currency/deposit ratio, ex-post real interest rates, the level of intermediated activity, deflation, employment and production) during the Great Depression period.

Suggested Citation

  • Russell Cooper & Dean Corbae, 1997. "Financial Fragility and the Great Depression," NBER Working Papers 6094, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:6094
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    1. Satyajit Chatterjee & Russell Cooper & B. Ravikumar, 1993. "Strategic Complementarity in Business Formation: Aggregate Fluctuations and Sunspot Equilibria," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 60(4), pages 795-811.
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    11. Cooper, Russell & Ejarque, Joao, 1995. "Financial intermediation and the Great Depression: a multiple equilibrium interpretation," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 43(1), pages 285-323, December.
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    Cited by:

    1. den Haan, Wouter J. & Ramey, Garey & Watson, Joel, 2003. "Liquidity flows and fragility of business enterprises," Journal of Monetary Economics, Elsevier, vol. 50(6), pages 1215-1241, September.
    2. repec:cdl:ucsdec:99-07r is not listed on IDEAS
    3. Lagunoff, Roger & Schreft, Stacey L., 2001. "A Model of Financial Fragility," Journal of Economic Theory, Elsevier, vol. 99(1-2), pages 220-264, July.
    4. Wouter J. DenHaan, 2002. "Temporary Shocks and Unavoidable Transistions to a High-Unemployment Regime," NBER Working Papers 9349, National Bureau of Economic Research, Inc.
    5. Franklin Allen & Douglas Gale, 2000. "Financial Contagion," Journal of Political Economy, University of Chicago Press, vol. 108(1), pages 1-33, February.
    6. Dressler, Scott J. & Kersting, Erasmus K., 2014. "Economies Of Scale In Banking, Confidence Shocks, And Business Cycles," Macroeconomic Dynamics, Cambridge University Press, vol. 18(5), pages 1069-1090, July.
    7. repec:cdl:ucsdec:99-07 is not listed on IDEAS
    8. Harold L. Cole & Lee E. Ohanian, 1999. "The Great Depression in the United States from a neoclassical perspective," Quarterly Review, Federal Reserve Bank of Minneapolis, vol. 23(Win), pages 2-24.
    9. Franklin Allen & Douglas Gale, 1998. "Financial Contagion Journal of Political Economy," Center for Financial Institutions Working Papers 98-31, Wharton School Center for Financial Institutions, University of Pennsylvania.
    10. Den Haan, Wouter J., 2003. "Temporary shocks and unavoidable transitions to a high-unemployment regime," Working Paper Series 239, European Central Bank.

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    More about this item

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy

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