Was the Great Depression a Low-Level Equilibrium?

36 Pages Posted: 4 Jul 2004 Last revised: 8 Mar 2021

See all articles by John K. Dagsvik

John K. Dagsvik

Statistics Norway

Boyan Jovanovic

New York University - Department of Economics

Date Written: June 1991


Was the Great Depression the outcome of a massive coordination failure? Or was it a unique equilibrium response to adverse shocks? More generally, do aggregates fluctuate partly because agents occasionally settle on inferior, low-level equilibria? These questions lie at the heart of the current disagreement over how one should view business cycles. This paper estimates an employment model with monetary and real shocks. In one region of the parameter-space the model yields uniqueness, while in the other it yields up to three equilibria. When more than one equilibrium exists, a selection rule is needed. The equilibrium selection rule that we use has a Markovian structure, but the money supply is denied a coordination role -- it can not affect the choice of the equilibrium point. The global maximum likelihood estimates lie in the uniqueness region, implying that instead of being a low-level, coordination-failure equilibrium, the Depression era was caused by movements in fundamentals only. This result held for each of the three subperiods (since 1900) for which the estimation was done, but the estimates are imprecise and the conclusions that we draw from them are tentative. The paper also computes the local maxima in the region of multiplicity, and here some of our estimates indicate that the years 1932 and 1933 would have exhibited low level equilibria had more than one equilibrium existed.

Suggested Citation

Dagsvik, John K. and Jovanovic, Boyan, Was the Great Depression a Low-Level Equilibrium? (June 1991). NBER Working Paper No. w3726, Available at SSRN: https://ssrn.com/abstract=312449

John K. Dagsvik

Statistics Norway ( email )

N-0033 Oslo
22 86 48 71 (Phone)

Boyan Jovanovic (Contact Author)

New York University - Department of Economics ( email )

19 w 4 st.
New York, NY 10012
United States

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