Abstract
In this dissertation, I examine theories of credit and goods market imperfections using U.S. economic data from the period 1913 to 1940. Chapter 1 provides a brief overview of the dissertation.
Chapter 2 is the historical background for the third chapter. In it, I focus on those aspects of the period that make it an ideal one for studying the effects of shifts in bank credit and balance sheet positions on credit constrained firms.
The third chapter uses panel data on the number and liabilities of business failures from 1895 to 1935, by industry, to test theories of monetary transmission based on asymmetric information. These theories imply that a contraction will increase the relative likelihood of default for credit constrained firms. I find that movements in the number of failures are better explained by the variation in aggregate prices and bank failures than by changes in real output. I also find that while cyclical downturns tended to decrease size in trade industries and had little effect in manufacturing industries, periods of deflation and bank failure were accompanied by increases in the size of failed firms within an industry. These findings suggest the importance of financial variables in explaining firm failure and that moderately-sized, more highly leveraged firms had a greater difficulty withstanding deflation and banking crises.
In Chapter 4, I examine the correlation between the mean and the skewness of wholesale price changes across industries from 1913 to 1940 to test for price rigidity. Just as others have found for the post-war period, I find a positive and statistically significant correlation. In contrast to the findings of other authors for the post-war period, however, the pre-war correlation cannot be explained by sampling bias in the correlation estimator. These results are consistent with the presence of price rigidity in the pre-war period. The difference between the pre- and post-war results is shown to be a smaller degree of heterogeneity in the variance of price changes across industries in the pre-war period. Finally, I look for evidence that the direction of price rigidity is a function of the underlying inflationary trend.