THE NONMONETARY EFFECTS OF FINANCIAL FACTORS DURING THE INTERWAR PERIOD

This paper employs vector autoregressions to estimate the nonmonetary effects of financial sector shocks on output and prices during the interwar period. Variance decompositions indicate that the nonmonetary financial proxies have significant and important effects. Impulse response functions indicate that most of the significant shocks to our financial crisis proxies have negative effects on output and prices. Focusing on the depressed conditions of the 1930s, historical decompositions indicate that the nonmonetay financial crisis variables are generally more important than the monetary base in explaining macro behavior. Our findings thus support theoretical models emphasizing the important nonmonetay effects of financial variables.