Working Paper: NBER ID: w25629
Authors: Margaret M. Jacobson; Eric M. Leeper; Bruce Preston
Abstract: When Roosevelt abandoned the gold standard in April 1933, he converted government debt from a tax-backed claim to gold to a claim to dollars, opening the door to unbacked fiscal expansion. Roosevelt followed a state-contingent fiscal rule that ran nominal-debt-financed primary deficits until the price level rose and economic activity recovered. Theory suggests that government spending multipliers can be substantially larger when fiscal expansions are unbacked than when they are tax-backed. VAR estimates using data on “emergency” unbacked spending and “ordinary” backed spending confirm this prediction and find that primary deficits made quantitatively important contributions to raising both the price level and real GNP after 1933. VAR evidence does not support the conventional monetary explanation that gold revaluation and gold inflows, which raised the monetary base, drove the recovery independently of fiscal actions.
Keywords: Fiscal Policy; Economic Recovery; Gold Standard; Unbacked Fiscal Expansion
JEL Codes: E31; E42; E6; N12
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| abandonment of the gold standard (F33) | transformation of government debt from a tax-backed obligation to a nominal claim (H63) |
| transformation of government debt from a tax-backed obligation to a nominal claim (H63) | larger government spending multipliers when fiscal expansions are unbacked (E62) |
| primary deficits (H62) | increase in real GNP (E20) |
| primary deficits (H62) | increase in price level (E31) |
| lower primary surpluses (H62) | persistent increases in prices (E31) |
| lower primary surpluses (H62) | persistent increases in output (E23) |
| unbacked fiscal expansion (E62) | critical factor in economic recovery (E65) |
| emergency spending (H84) | larger effects on price level (E30) |
| emergency spending (H84) | larger effects on real GNP (F69) |
| gold supply shocks (E59) | weak predictive power for prices and output (E30) |