Fiscal Policy in a Depressed Economy: Was There a 'Free Lunch' in 1930s' Britain?
33 Pages Posted: 1 Feb 2013
Date Written: January 2013
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
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