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EH447, 08/09, Week 3-1 Great Depressions in Economic History

EH447, 08/09, Week 3-1 Great Depressions in Economic History. Fisher v Keynes: A Housing Bubble?. Irving Fisher on Housing. 1929: “high level of stock market justified” (see next lecture) Got into negative equity on his house in New Haven/CT (Yale Univ.)

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EH447, 08/09, Week 3-1 Great Depressions in Economic History

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  1. EH447, 08/09, Week 3-1 Great Depressions in Economic History Fisher v Keynes: A Housing Bubble?

  2. fisher v Keynes: A Housing Bubble? Irving Fisher on Housing • 1929: “high level of stock market justified” (see next lecture) • Got into negative equity on his house in New Haven/CT (Yale Univ.) • Developed debt-deflation doctrine as a result

  3. fisher v Keynes: A Housing Bubble? Housing Market in U.S. • Residential construction up in the 1920s • Serious housing slump after 1929 • Keynesian interpretation focused on this

  4. fisher v Keynes: A Housing Bubble? Keynes (1937) on G-D • World caught between two Malthusian Devils • Overpopulation • Underemployment • Population slowdown in U.S., Europe • Necessitates investment slowdown • and decline in savings rates

  5. fisher v Keynes: A Housing Bubble? Secular Stagnation Hypothesis Keynes (1937), Hansen (1938, 1941): • Investment rates should go down • Consumption / income ratios should go up BUT • Consumption decision behavioral  Interest rate mechanism ineffective  necessary downward adjustment of saving is delayed  Long term unemployment

  6. fisher v Keynes: A Housing Bubble? Residential investment Temin (1971): • Investment slump causal for G-D • Much of this led by housing slump • Moderate version of Keynes/Hansen view  Received scathing criticism

  7. fisher v Keynes: A Housing Bubble? Evidence: value of residential building permits

  8. fisher v Keynes: A Housing Bubble? Forecasts mostly in line with realized output data, already before NYSE crash Evidence: forecasting the G-D from leading indicators on investment

  9. fisher v Keynes: A Housing Bubble? Conclusion • Keynesian interpretation originally a long-term (“secular”) approach • Centers around expected end of growth on extensive margin • Consistent with evidence on investment

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