This content downloaded from 129948182 on Wed 17 May 2017 021224 UTC All use

This content downloaded from 129948182 on wed 17 may

This preview shows page 15 - 17 out of 21 pages.

This content downloaded from 129.94.8.182 on Wed, 17 May 2017 02:12:24 UTC All use subject to
Image of page 15

Subscribe to view the full document.

VOL. 73 NO. 3 BERNANKE: GREATDEPRESSION 271 distributed lag) was large (comparable to the monetary effect), negative, and significant at the 95 percent level. For the entire interwar sample, however, the statistical significance of this variable was much reduced. This last result is due to the fact that the recovery of 1933-41 was financed by nonbank sources, with bank loans remaining at a low level. 2) Another proxy for the financial crisis that was tried was the differential between Baa corporate bond yields and the yields on U.S. bonds. As described in Section I.C, this variable responded strongly to both bank crises and the problems of debtors, and as such was a sensitive indicator of financial market conditions. The yield differential variable turned out to enter very strongly as an explanator of current and future output growth, overall and in every subsample. As much of this predictive power was no doubt due to pure financial market anticipations of future output declines, I also put the dif- ferential variable through a first-stage regres- sion on the liabilities of bank and business failures. Assuming that these latter variables themselves were not determined by anticipa- tions of future output declines (see below), the use of the fitted series from this regres- sion "purged" the differential variable of its pure anticipatory component. The fitted series entered the output equations less strongly than the raw series, but it retained the right sign and statistical significance at the 95 percent confidence level. In almost every case, then, the addition of proxies for the general financial crisis im- proved the purely monetary explanation of short-run (monthly) output movements. This finding was robust to the obvious experi- ments. For example, with the above-noted exception of the credit variable in 1933-41, coefficients remained roughly stable over subsamples. Another experiment was to in- clude free dummy variables for each quarter from 1931:1 to 1932:IV in the above re- gressions. The purpose of this was to test the suggestion that our results are only a reflec- tion of the fact that both the output and financial crisis variables "moved a lot" dur- ing 1930-33. The rather surprising discovery was that the inclusion of the dummies increased the magnitude and statistical sig- nificance of the coefficients on bank and business failures. Finally, the economic sig- nificance of the results was tested by using the various estimated equations to run dy- namic simulations of monthly levels of in- dustrial production (relative to trend) for mid-1930 to March 1933. Relative to the pure money-shock and price-shock simula- tions described above, the equations includ- ing financial crisis proxies did well. Equa- tions (3) and (4) reduced the mean squared simulation error over (1) and (2) by about 50 percent. The other (nonreported) equations did better; for example, those using the yield differential variable reduced the MSE of simulation from 90 to 95 percent.
Image of page 16
Image of page 17
  • Fall '13
  • Updike-Tarrozi

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern

Ask Expert Tutors You can ask 0 bonus questions You can ask 0 questions (0 expire soon) You can ask 0 questions (will expire )
Answers in as fast as 15 minutes