Financial factors and the propagation of the Great Depression

We investigate the role of forward-looking financial factors in propagating the Great Depression. We find that a new hand-collected bank stock index is better at predicting the onset of the Great Depression than the aggregate stock market or failed bank deposits. The bank stock index explains almost...

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Bibliographic Details
Published inJournal of financial economics Vol. 145; no. 2; pp. 577 - 594
Main Authors Cortes, Gustavo S., Taylor, Bryan, Weidenmier, Marc D.
Format Journal Article
LanguageEnglish
Published Elsevier B.V 01.08.2022
Subjects
Bank stocks
Credit channel
Forward-looking information
Great Depression
E32
G21
E37
Bank stocks
Forward-looking information
Great Depression
N12
Credit channel
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Summary:We investigate the role of forward-looking financial factors in propagating the Great Depression. We find that a new hand-collected bank stock index is better at predicting the onset of the Great Depression than the aggregate stock market or failed bank deposits. The bank stock index explains almost one-third of the fluctuations in industrial production after five years. Analysis disaggregated at each Federal Reserve district shows that bank stocks capture forward-looking information about debt defaults and credit. Our results suggest that future studies of the credit channel during the Great Depression should incorporate bank stocks to better identify the impact of credit crunches on economic activity.
ISSN:0304-405X
1879-2774
DOI:10.1016/j.jfineco.2021.08.018