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Great expectations and the end of the depression

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  • Gauti B. Eggertsson

Abstract

This paper argues that the U.S. economy's recovery from the Great Depression was driven by a shift in expectations brought about by the policy actions of President Franklin Delano Roosevelt. On the monetary policy side, Roosevelt abolished the gold standard and-even more important-announced the policy objective of inflating the price level to pre-depression levels. On the fiscal policy side, Roosevelt expanded real and deficit spending. Together, these actions made his policy objective credible; they violated prevailing policy dogmas and introduced a policy regime change such as that described in work by Sargent and by Temin and Wigmore. The economic consequences of Roosevelt's policies are evaluated in a dynamic stochastic general equilibrium model with sticky prices and rational expectations.

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Bibliographic Info

Paper provided by Federal Reserve Bank of New York in its series Staff Reports with number 234.

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Date of creation: 2005
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Handle: RePEc:fip:fednsr:234

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Keywords: Depressions ; Gold standard ; Price levels ; Rational expectations (Economic theory) ; Economic policy;

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