The Ends of 27 Big Depressions

Journal: American Economic Review

Date: 20240101

Author: Ellison, Martin; Lee, Sang Seok; O'Rourke, Kevin Hjortshoj

Abstract:
How did countries recover from the Great Depression? In this paper, we explore the argument that leaving the gold standard helped by boosting inflationary expectations, lowering real interest rates, and stimulating interest-sensitive expenditures. We do so for a sample of 27 countries, using modern nowcasting methods and a new dataset containing more than 230,000 monthly and quarterly observations for over 1,500 variables. In those cases where the departure from gold happened on well-defined dates, inflationary expectations clearly rose in the wake of departure. Instrumental variable, difference-in-difference, and synthetic matching techniques suggest that the relationship is causal.

Link: Google Scholar


Key Findings

Leaving Gold Standard Led to Recovery

Countries that abandoned the gold standard saw increases in inflation expectations and declines in real interest rates, facilitating economic recovery from the Great Depression

Timing of Recovery

Early leavers (Sep-Dec 1931) experienced faster recoveries compared to countries that maintained gold standard longer or only implemented exchange controls

Real Interest Rate Effects

Average decline in real interest rates one year after leaving gold was 8.4 percentage points, with 7.8 percentage points due to rising inflation expectations

Changes in Real Interest Rates After Leaving Gold

Decomposition of Real Interest Rate Changes

Prices and Output After Leaving Gold

Contribution and Implications

Data Sources