SOURCES OF OUTPUT FLUCTUATIONS DURING THE INTERWAR PERIOD - FURTHER EVIDENCE ON THE CAUSES OF THE GREAT-DEPRESSION

This paper decomposes output fluctuations during the 1913 to 1940 peri od into components resulting from aggregate supply and aggregate deman d shocks. We estimate a number of structural models, all of which yiel d qualitatively similar results. While identification is normally achi eved by assuming that aggregate demand shocks have no long-run real ef fects, we also estimate models that allow demand shocks to permanently affect output. Our findings support the following three conclusions: (i) there was a large negative aggregate demand shock in November 1929 , immediately after the stock market crash; (ii) aggregate demand shoc ks are largely responsible for the decline in output through mid-1931; and (iii) beginning in mid-1931 there is an aggregate supply collapse that coincides with the onset of severe bank panics.