Abstract
This paper decomposes output fluctuations during the 1913 to 1940 period into components resulting from aggregate supply and aggregate demand shocks. We estimates a number of different models, all of which yield qualitatively similar results. While identification is normally achieved by assuming that aggregate demand shocks have no long run real effects, we also estimate models that allow demand shocks to permanently affect output. Our findings support the following three conclusions: (i) there was a large negative aggregate demand shock in November 1929, immediately after the stock market crash; (ii) aggregate demand shocks are mainly responsible for the decline in output through mid to late 1931; (iii) beginning in mid 1931 there is an aggregate supply collapse that coincides with the onset on severe bank panics.