The Household Balance Sheet and the Great Depression

1978 ◽  
Vol 38 (4) ◽  
pp. 918-937 ◽  
Author(s):  
Frederic S. Mishkin
Keyword(s):  
Great Depression ◽  
Aggregate Demand ◽  
Balance Sheet ◽  
Consumer Expenditure ◽  
Balance Sheets ◽  
The Great Depression ◽  
Transmission Mechanisms ◽  
Balance Sheet Effects ◽  
The Business Cycle ◽  
Demand Shifts

This paper focuses on changes in household balance sheets during the Great Depression as transmission mechanisms which were important in the decline of aggregate demand. Theories of consumer expenditure postulate a link between balance-sheet movements and aggregate demand, and applications of these theories indicate that balance-sheet effects can help explain the severity of this economic contraction. In analyzing the business cycle movements of this period, this paper's approach is Keynesian in character in that it emphasizes demand shifts in particular sectors of the economy; yet it has much in common with the monetarist approach in that it views events in financial markets as critical to our understanding of the Great Depression.

scholarly journals Structural Transformation, Deep Downturns, and Government Policy

2019 ◽  
pp. 34-44
Author(s):  
Joseph E. Stiglitz
Keyword(s):  
Government Policy ◽  
Service Sector ◽  
Balance Sheet ◽  
Structural Transformations ◽  
Government Policies ◽  
Balance Sheets ◽  
The Great Depression ◽  
Balance Sheet Effects ◽  
Limited Efficacy ◽  
Economic Transformations

Most recessions are a result of some shock to the economic system, typically amplified by financial accelerators, and leading to large, persistent balance sheet effects on households and firms. Over time, however, the balance sheets get restored. Even banks recover. But episodically, the ‘shock’ is deeper. It is structural. Among advanced countries, such large economic transformations include the movement from agriculture to manufacturing (completed in the twentieth century), and the more recent movement from manufacturing to the service sector. The associated downturns are longer lasting. The usual tools for restoring growth, particularly monetary policy, are of only limited efficacy. Policies have to be designed to facilitate such transformations: markets on their own typically do not do well. This chapter explains why such transformations are associated with persistently high unemployment, and what kinds of government policies are needed. It looks at the lessons of the Great Depression both for the advanced countries and the developing countries today as they go through their structural transformations.

Credit supply shocks and the Great Depression in Germany

2020 ◽  
Author(s):  
Max Breitenlechner ◽  
Daniel Gründler ◽  
Gabriel P Mathy ◽  
Johann Scharler
Keyword(s):  
Great Depression ◽  
Aggregate Demand ◽  
Banking Crisis ◽  
Expansion Phase ◽  
Vector Autoregressive ◽  
Credit Supply ◽  
The Great Depression ◽  
Supply Shocks ◽  
Structural Vector Autoregressive Model ◽  
Structural Vector

Abstract At the peak of the Great Depression in mid-1931, Germany experienced a severe banking crisis. We study to what extent credit constraints contributed to the downturn by fitting a structural vector autoregressive model with data from January 1925 to September 1935. Adverse credit supply shocks contributed strongly to the downturn especially at the time of the 1931 banking crisis. Before that, credit supply shocks had also contributed to the expansion phase preceding the depression. We also find that aggregate demand and U.S. business cycle shocks were the primary drivers of the German Great Depression.

Debt, Deleveraging, and the Liquidity Trap: A Fisher-Minsky-Koo Approach*

2012 ◽  
Vol 127 (3) ◽  
pp. 1469-1513 ◽  
Author(s):  
Gauti B. Eggertsson ◽  
Paul Krugman
Keyword(s):  
Fiscal Policy ◽  
Great Depression ◽  
Aggregate Demand ◽  
New Keynesian ◽  
Liquidity Trap ◽  
The Great Depression ◽  
Lost Decade ◽  
Debt Deflation

Abstract In this article we present a simple new Keynesian–style model of debt-driven slumps—that is, situations in which an overhang of debt on the part of some agents, who are forced into rapid deleveraging, is depressing aggregate demand. Making some agents debt-constrained is a surprisingly powerful assumption. Fisherian debt deflation, the possibility of a liquidity trap, the paradox of thrift and toil, a Keynesian-type multiplier, and a rationale for expansionary fiscal policy all emerge naturally from the model. We argue that this approach sheds considerable light both on current economic difficulties and on historical episodes, including Japan’s lost decade (now in its 18th year) and the Great Depression itself.

scholarly journals Atif Mian and Amir Sufi. House of Debt: How They (and You) Caused the Great Recession, and How We Can Prevent It from Happening Again. University of Chicago Press. USA. 2014. 192 pages.

2013 ◽  
Vol 52 (3) ◽  
pp. 247-260
Author(s):  
Asad Zaman Kemal
Keyword(s):  
Financial Crisis ◽  
Financial Markets ◽  
Great Depression ◽  
Global Financial Crisis ◽  
Aggregate Demand ◽  
Jel Classification ◽  
Recent Book ◽  
The Great Recession ◽  
The Great Depression ◽  
University Of Chicago Press

This is a review and a summary of some of the key arguments presented by Mian and Sufi in their recent book “House of Debt.” It highlights the contribution of Mian and Sufi by showing how they have solved the mystery of why there was a huge drop in aggregate demand during the Great Depression of 1929 and also following the recent Global Financial Crisis of 2007-08. The article shows how major economists like Keynes, Friedman, Lucas and others tried and failed to provide an adequate explanation of this mystery. The key to the mystery is the huge amount of levered debt present during both of these economic crises. The solution suggested by Mian and Sufi is to replace interest based debt by equity based contracts in financial markets. This solution resonates strongly with Islamic teachings on finance. These links are also highlighted in this article. JEL classification: B22, E12, E32 Keywords: Great Depression, Global Financial Crisis, Debt-Deflation, Levered Debt

scholarly journals Integrated Reporting – a concept whose time has come

2011 ◽  
Vol 85 (11) ◽  
pp. 535-536 ◽  
Author(s):  
Mervyn E. King
Keyword(s):  
Great Depression ◽  
Balance Sheet ◽  
Financial Statements ◽  
The United States ◽  
Income Taxation ◽  
Integrated Reporting ◽  
The Great Depression ◽  
Income Statement ◽  
History Of ◽  
Global Events

85E JAARGANG NOVEMBER 535 Thema The history of accountancy establishes that changes to reporting standards and practices occurred as a result of global events or crises. It was said that one of the causes of the Great Depression of the 1930s was the value of assets on the basis of mark to market. This type of valuation was consequently abandoned in some jurisdictions, but was retained in others. The great depression also resulted in the implementation of generally accepted standards of accounting in the United States. It also led to stock issues as a leading method of financing expansion. As stockholders, rather than bankers, became the primary audience of financial statements, the income statement began to take centre stage over the balance sheet. Other factors, such as income taxation and cost accounting, shifted the focus to revenue and profit.

Currency Crises, Monetary Policy and Corporate Balance Sheets

2007 ◽  
Vol 8 (3) ◽  
pp. 309-343 ◽  
Author(s):  
Sylvester C. W. Eijffinger ◽  
Benedikt Goderis
Keyword(s):  
Monetary Policy ◽  
Exchange Rate ◽  
Interest Rate ◽  
Currency Crises ◽  
Balance Sheet ◽  
Balance Sheets ◽  
Output Loss ◽  
Balance Sheet Effects ◽  
Loss Compensation ◽  
Exchange Rate Changes

Abstract This paper studies how the exposure of a country’s corporate sector to interest rate and exchange rate changes affects the probability of a currency crisis. To analyze this question, we present a model that defines currency crises as situations in which the costs of maintaining a fixed exchange rate exceed the costs of abandonment. The results show that a higher exposure to interest rate changes increases the probability of crisis through an increased need for output loss compensation and an increased efficacy of monetary policy in stimulating output. A higher exposure to exchange rate changes also increases the need for output loss compensation. However, it lowers the efficacy of monetary policy in stimulating output through the adverse balance sheet effects of exchange rate depreciation. As a result, its effect on the probability of crisis is ambiguous.

scholarly journals Debt and Financial Sentiment. Early Keynes on Balance Sheet Effects of Asset Price Changes

2020 ◽  
Vol 89 (1) ◽  
pp. 45-58
Author(s):  
Korkut Alp Ertürk ◽  
Jake Jennings
Keyword(s):  
Economic Performance ◽  
Asset Prices ◽  
Asset Price ◽  
Balance Sheet ◽  
Future Expectations ◽  
Private Debt ◽  
Price Changes ◽  
Balance Sheet Effects ◽  
Current Asset ◽  
The Business Cycle

Summary: The paper explores the link between financial sentiment and private debt, using Keynes’s A Treatise on Money as a conceptual backdrop. In responding to his critics after the publication of his General Theory Keynes famously talked about unexpected, violent changes in conventional asset valuations resulting from doubts with a life of their own boiling over onto the surface. Such doubts he argued influenced the size of what he called the bear position, which in his Treatise on Money he took to be an index of financial sentiment. Minsky also drew from Keynes’s earlier work when he famously argued that optimistic future expectations raise asset prices, creating a margin that enables firms to access finance in the present. However, neither asset price speculation nor shifting financial sentiment over the business cycle received in his work the kind of attention they did in Keynes’s Treatise. The focus of this paper is what Minsky left unexplored on financial sentiment and the balance sheet effects of asset price changes in the Treatise, which sheds light on when private debt can become excessive. The central insight is that financial sentiment begins to diverge when economic performance unexpectedly falls short, raising doubts that current asset prices are excessive. While the economy might be debt-led when financial sentiment is strong it tends to become debt-burdened as sentiment weakens.

scholarly journals Collateral Damage: The Impact of Foreclosures on New Home Mortgage Lending in the 1930s

2020 ◽  
Vol 80 (3) ◽  
pp. 853-885
Author(s):  
Price Fishback ◽  
Sebastian Fleitas ◽  
Jonathan Rose ◽  
Ken Snowden
Keyword(s):  
Real Estate ◽  
Great Depression ◽  
Mortgage Lending ◽  
Credit Crunch ◽  
Collateral Damage ◽  
Balance Sheets ◽  
The Great Depression ◽  
Mortgage Credit ◽  
Home Mortgage ◽  
The Impact

The Great Depression of the 1930s involved a severe disruption in the supply of home mortgage credit. This paper empirically identifies a mechanism lying behind this credit crunch: the impairment of lenders’ balance sheets by illiquid foreclosed real estate. With data on hundreds of building and loans (B&Ls), the leading mortgage lenders in this period, we find that the overhang of foreclosed real estate explains about 30 percent of the drop in new lending between 1930 and 1935.

scholarly journals What Ended the Great Depression?

1992 ◽  
Vol 52 (4) ◽  
pp. 757-784 ◽  
Author(s):  
Christina D. Romer
Keyword(s):  
Interest Rates ◽  
Great Depression ◽  
Durable Goods ◽  
Aggregate Demand ◽  
Real Output ◽  
Money Stock ◽  
The Great Depression ◽  
Investment Spending ◽  
The U.S

This paper examines the role of aggregate-demand stimulus in ending the Great Depression. Plausible estimates of the effects of fiscal and monetary changes indicate that nearly all the observed recovery of the U.S. economy prior to 1942 was due to monetary expansion. A huge gold inflow in the mid- and late 1930s swelled the money stock and stimulated the economy by lowering real interest rates and encouraging investment spending and purchases of durable goods. That monetary developments were crucial to the recovery implies that self-correction played little role in the growth of real output between 1933 and 1942.

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