Working Paper: CEPR ID: DP136
Authors: Barry Eichengreen; Charles Wyplosz
Abstract: Following the fiscal stabilisation of 1926 and the accompanying return of the French franc to the Gold Standard, France enjoyed several years of fast growth and remained immune to the effects of the Great Depression until early 1931. Accounts of this period emphasize the undervaluation of the Franc Poincare of 1926 and the attendant export-led recovery. The undervaluation of the franc, in turn, is largely related to monetary policy. We show that exports cannot account for the delayed onslaught of the Great Depression and identify investment as the proximate driving force. We also claim that fiscal policy played a major role explaining simultaneously the undervaluation of the franc and the investment boom. The paper presents a dynamic model of fiscal policy as well as supporting empirical evidence.
Keywords: monetary policy; fiscal policy; undervaluation of the franc; investment boom; exchange rate
JEL Codes: 023; 044; 311; 431
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Fiscal policy (E62) | Investment (G31) |
| Fiscal policy (E62) | Undervaluation of the franc (F31) |
| Fiscal policy (E62) | Economic performance (P17) |
| Budget surplus, real effective exchange rate, share of investment in GNP (H62) | Investment spending (E20) |
| Reduction in budget deficit (H69) | Domestic savings available to private investors (D14) |
| Domestic savings available to private investors (D14) | Investment boom (E22) |
| Fiscal stabilization (E63) | Investment surge (G31) |
| Undervaluation of the franc (F31) | Economic performance (resilience) (P47) |