Gabriel Patrick Mathy
Published: 2013
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The United States of the 1930s experienced unprecedented uncertainty including the stock market crash of October 1929, a severe banking crises, major political changes, the breakdown of the gold standard, uncertain monetary policies, and the uncertainties surrounding the brewing World War. This dissertation constructs and analyzes four uncertainty measures: stock volatility, a newspaper index of uncertainty mentions, credit spreads, and a high volatility indicator of uncertainty shock events. These four uncertainty measures are then used to analyze the effect of uncertainty shocks on the American economy of the 1930s. I begin with an introduction of the issue of the Great Depression in macroeconomics and where this dissertations fits in the existing literature. The first chapter, entitled "Identifying Uncertainty Shocks in the American Great Depression," uses a financial econometric test of volatile returns to identify periods of high uncertainty, which are then matched with plausible uncertainty shock events by a careful study of the historical record. In the second chapter, entitled "Modelling Uncertainty Shocks in the U.S. Great Depression," a dynamic stochastic general equilibrium (DSGE) model is calibrated to conditions of the 1930s. This model is then simulated for an uncertainty shocks, and the simulations show that nominal rigidites and passive monetary policies help explain why uncertainty shocks would matter more in the Great Depression. The third chapter, entitled "The Empirics of Uncertainty Shocks in the U.S. Great Depression," discusses previous empirical results regarding uncertainty in the Great Depression, and then derives empirical results using vector autoregressions to quantify the effect of uncertainty on the broader macroeconomy in the data. Based on these multifaceted sources of evidence, I find that uncertainty shocks played a significant role in the U.S. Great Depression.