Working Paper: CEPR ID: DP7564
Authors: Miguel Almunia; Agustín Bénétrix; Barry Eichengreen; Kevin H. O'Rourke; Gisela Rua
Abstract: The Great Depression of the 1930s and the Great Credit Crisis of the 2000s had similar causes but elicited strikingly different policy responses. It may still be too early to assess the effectiveness of current policy responses, but it is possible to analyze monetary and fiscal policies in the 1930s as a 'natural experiment' or 'counterfactual' capable of shedding light on the impact of recent policies. We employ vector autoregressions, instrumental variables, and qualitative evidence for a panel of 27 countries in the period 1925-1939. The results suggest that monetary and fiscal stimulus was effective - that where it did not make a difference it was not tried. The results also shed light on the debate over fiscal multipliers in episodes of financial crisis. They are consistent with multipliers at the higher end of those estimated in the recent literature, consistent with the idea that the impact of fiscal stimulus will be greater when banking system are dysfunctional and monetary policy is constrained by the zero bound.
Keywords: credit crisis; Great Depression; multipliers
JEL Codes: E63; N10
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Substantial fiscal stimuli in Italy and France (E62) | Significant economic growth (O49) |
| Limited application of fiscal measures (H39) | Lack of observed effects in previous studies (C90) |
| Expansionary monetary policies (E52) | Positive influence on economic activity (F69) |
| Aggressive fiscal stimulus currently implemented (E62) | Mitigate expected contraction in global GDP (F69) |
| Fiscal policy applied at sufficient scale (E62) | Positive impact on GDP during the 1930s (F69) |