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Monetary disturbance or financial market collapse: tests of two theories of the Great Depression

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  • Barbara McKiernan

Abstract

The monetary disturbance theory of the Depression, explained by Friedman and Schwartz (1963) asserts that the Depression was so deep and long because the Federal Reserve pursued a tight monetary policy. More recently, Bernanke (1983) has shown that financial market crisis also lowered output in the 1930s. It is probable that the decline in the money supply caused the credit market problems, but this may not be the main or the only avenue through which the money supply affected output. This paper shows that monetary aggregates have substantial explanatory power over output once the credit market collapse has been taken into account.

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  • Barbara McKiernan, 1998. "Monetary disturbance or financial market collapse: tests of two theories of the Great Depression," Applied Financial Economics, Taylor & Francis Journals, vol. 8(2), pages 133-144.
    • Handle: RePEc:taf:apfiec:v:8:y:1998:i:2:p:133-144
    DOI: 10.1080/096031098333113
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    References listed on IDEAS

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    1. Eichengreen, Barry, 1996. "Golden Fetters: The Gold Standard and the Great Depression, 1919-1939," OUP Catalogue, Oxford University Press, number 9780195101133.
    2. Prakash Loungani & Mark Rush & William Tave, 1990. "Stock market dispersion and real economic activity: evidence from quarterly data," Working Paper Series, Macroeconomic Issues 90-15, Federal Reserve Bank of Chicago.
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