Investment and Uncertainty: Precipitating the Great Depression in the United States

20 Pages Posted: 17 Jan 2007

See all articles by David Greasley

David Greasley

University of Edinburgh

Jakob B. Madsen

University of Copenhagen - Department of Economics

Abstract

A severe collapse of fixed capital formation distinguished the onset of the Great Depression from other investment downturns between the world wars. Using a model estimated for the years 1890-2000, we show that the expected profitability of capital measured by Tobin's q, and the uncertainty surrounding expected profits indicated by share price volatility, were the chief influences on investment levels, and that heightened share price volatility played the dominant role in the crucial investment collapse in 1930. Investment did not simply follow the downward course of income at the onset of the depression: rather, its slump helped to propel the wider collapse.

Suggested Citation

Greasley, David and Madsen, Jakob Bruechner, Investment and Uncertainty: Precipitating the Great Depression in the United States. Economica, Vol. 73, No. 291, pp. 393-412, August 2006, Available at SSRN: https://ssrn.com/abstract=918581 or http://dx.doi.org/10.1111/j.1468-0335.2006.00505.x

David Greasley (Contact Author)

University of Edinburgh ( email )

Old College
South Bridge
Edinburgh, Scotland EH8 9JY
United Kingdom

Jakob Bruechner Madsen

University of Copenhagen - Department of Economics ( email )

Øster Farimagsgade 5
Bygning 26
1353 Copenhagen K.
Denmark

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