By Harold Cole and Lee Ohanian
This study exploits panel data from 18 countries to assess the contributions of cartelization policies, monetary shocks, and productivity shocks on macroeconomic activity during the Great Depression. To construct a parsimonious and common model framework, we use the fact that many cartel policies are observationally equivalent to a country-specific labor tax wedge. We estimate a monetary DSGE model with cartel wedges along with productivity and monetary shocks. Our main finding is that cartel policy shocks account for the bulk of the Depression in the countries that adopted significant cartel policies, including the large depressions in the U.S., Germany, Italy, and Australia, and that the estimated cartel policy shocks plausibly coincide with the actual evolution of policies in these countries. In contrast, cartel policy shocks in the countries that did not significantly change policies were small and account for little of their Depressions.
An important follow-up of the Cole-Ohanian research agenda about understanding the Great Depression. And once more, they find that cartelization practices were harmful. The fact that a cartel is harmful is hardly a surprise, but in the context of the Great Depression, this has been met with a lot of resistance for the case of the US. It turns out the international evidence is consistent as well. Will this be convincing?