The Impact of Capital Market Developments and Monetary Policy on the "Great Depression" and the "Great Recession"

Descriptive data shows for the hardest-hit countries that the interest level in relation to GDP growth was below long-term average in the periods before both crises. Furthermore these periods were characterised by rising share prices. Whether capital markets were overvalued is seen controversially in the empirical literature. In this paper I find indication that at least a few stock market indices were overheated before the "Great Depression" and the "Great Recession". These indices were not hit harder by the stock market crisis concerning length or maximum drawdown than non-overvalued indices. But interestingly these indices had a worse performance in the periods after the crises.