Fiscal Policy in a Depressed Economy: Was There a 'Free Lunch' in 1930s' Britain?

33 Pages Posted: 1 Feb 2013

See all articles by Nicholas Crafts

Nicholas Crafts

University of Warwick

Terence C. Mills

Loughborough University - Department of Economics

Date Written: January 2013

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 Classification: E62, N14

Suggested Citation

Crafts, Nicholas and Mills, Terence C., Fiscal Policy in a Depressed Economy: Was There a 'Free Lunch' in 1930s' Britain? (January 2013). CEPR Discussion Paper No. DP9273. Available at SSRN: https://ssrn.com/abstract=2210243

Nicholas Crafts (Contact Author)

University of Warwick ( email )

Gibbet Hill Rd.
Coventry, West Midlands CV4 8UW
United Kingdom

Terence C. Mills

Loughborough University - Department of Economics ( email )

York House
Loughborough LE11 3TU
Great Britain
+44 1509 222703 (Phone)
+44 1509 223910 (Fax)

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