Noise Shocks and the Great Depression: A Structural Reassessment

L’Huillier and Yoo (2017) argue that bad news unrelated to fundamentals played a major role in the Great Depression. I reassess that claim by estimating a medium-scale DSGE model with signal extraction on productivity, in the spirit of Blanchard et al. (2013), on US data for 1923–1940.

Noise shocks turn out to be significant but not a major source of fluctuations, mainly because they are not persistent; the earlier result is largely driven by leaving out other sources of disturbance.

The paper develops my MRes thesis, News and Noise in the Great Depression (Université catholique de Louvain, 2019, supervised by Luca Pensieroso).