Working Paper: CEPR ID: DP9273
Authors: Nicholas Crafts; Terence C. Mills
Abstract: We report estimates of the fiscal multiplier for interwar Britain based on quarterly data and time-series econometrics. We find that the government-expenditure multiplier was in the range 0.3 to 0.9 even during the period when interest rates were at the lower bound. The scope for a 'Keynesian solution' to recession was much less than is generally supposed. In the later 1930s but not before Britain's exit from the gold standard, there was a 'fiscal free lunch' in the sense that deficit-financed government spending would have improved public finances enough to pay for the interest onthe extra debt.
Keywords: defence; news; keynesian solution; multiplier; public works; self-defeating austerity
JEL Codes: E62; N14
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| deficit-financed government spending (E62) | public finances (H69) |
| government spending (H59) | private sector expenditure (H50) |
| expectations of future tax increases (H31) | effectiveness of fiscal policy (E62) |
| government spending (H59) | GDP (E20) |
| defense spending (H56) | GDP (E20) |