Transcript Romer – Great Crash

Romer
“The Great Crash and the Onset of the Great Depression”
Economics 639 / American University / Vaughan
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Background
Consumption fell dramatically from 1929 to
1930 before banking panics began. Indeed,
from 1929-1930, real consumption
expenditure fell by 5.4% - accounting for
more than 2/3rds of decline in real GDP.
Why? Romer (Great Crash) and Olney explain why.
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Romer – Great Crash
Key Point
1929 stock-market crash/continued stock-price gyrations in 1930
created uncertainty about future of economy/future income.
Uncertainty led consumers to postpone purchases of irreversible
durable goods.
• Evidence of Uncertainty: Decline in surety expressed by
contemporary forecasters.
• Evidence Uncertainty Affected Consumer Behavior: Drastic decline
in spending on consumer durables in late 1929, while spending on
perishable goods rose slightly.
• Robustness Check: Importance of effect confirmed by “significant”
negative relationship between stock-market variability and
spending on consumer durables (relative to nondurables) following
1987 stock- market crash.
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Other Evidence
• Forecaster uncertainty spiked in 1930, relative
to 1920s.
• Equation estimates for 1987 stock market
crash show similar effects (i.e., uncertainty
lowered spending on consumer durables), but
effect shorter lived.
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Critical Analysis of Paper
• Strengths: Use of quantitative (regressions) as
well as qualitative evidence (measures of
forecaster uncertainty)
• Weakness: – No formal micro-foundation
model, just narrative (?)
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Story Thus Far…
Recession Starts Morphing into Depression
Long-Run Aggregate Supply
(Potential Output)
Price
Level
P1
A
P2
P3
B
C
Short-Run Aggregate Supply
(Sticky Wages)
Stock-market gyrations caused uncertainty
about future income, which in turn led
consumers to postpone expenditures on
irreversible durables. Decline in
consumption spending (AD) reduced price
level and real output further than decline
initially caused by tight money.
Aggregate Demand (AD)1 – Original
AD2– Tight Money (1928)
AD3 - Uncertainty after Stock-Market Crash (1930)
Y3
Y2
Y1= Yp
Real
Output
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