From Great Depression to Great Credit Crisis: Similarities, Differences and Lessons
University of California, Berkeley - Department of Economics
Agustín S. Bénétrix
University of Dublin - Trinity College
University of California, Berkeley - Department of Economics; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)
Kevin H. O’Rourke
affiliation not provided to SSRN
Federal Reserve Board; University of California, Berkeley - Department of Economics
Economic Policy, Vol. 25, Issue 62, pp. 219-265, April 2010
The Great Depression of the 1930s and the Great Credit Crisis of the 2000s had similar causes but elicited strikingly different policy responses. While it remains too early to assess the effectiveness of current policy, it is possible to analyse monetary and fiscal responses in the 1930s as a natural experiment or counterfactual capable of shedding light on the impact of current policies. We employ vector autoregressions, instrumental variables, and qualitative evidence for 27 countries in the period 1925–39. The results suggest that monetary and fiscal stimulus was effective -- that where it did not make a difference it was not tried. They 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, and with the argument that the impact of fiscal stimulus will be greater when banking systems are dysfunctional and monetary policy is constrained by the zero bound.
Number of Pages in PDF File: 47Accepted Paper Series
Date posted: April 5, 2010
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