Are 1920s economic fluctuations driven by demand or supply: a case study of India using forecast error variance decomposition in vector autoregressive model

Abstract

Forecast error variance decomposition in the vector autoregressive model is used to investigate whether the supply shock or the demand shock was the primary factor that drove changes in the global economy throughout the 1920s. It is found that supply shocks are the primary factor in determining how much cotton fabric is produced in India, whereas changes in the cost of living for people are mostly the result of demand shocks.