DP3067 The Great Demand Depression

Author(s): Mark Weder
Publication Date: November 2001
Keyword(s): demand shocks, dynamic general equilibrium, great depression
JEL(s): E32, N12
Programme Areas: International Macroeconomics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=3067

This Paper entertains the notion that disturbances on the demand side play a central role in our understanding of the Great Depression. In fact, from Euler equation residuals I am able to identify a series of unusually large negative demand shocks that appeared to have hit the US economy during the 1930s. I apply these measured demand shocks to a dynamic general equilibrium model and find that size and sequence of shocks can generate a pattern of the model economy that is not unlike data. The model is able to account for the lion?s share of the decline in economic activity and is able to exaggerate realistic persistence.