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Was the New Deal contractionary?

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  • Gauti B. Eggertsson

Abstract

Can government policies that increase the monopoly power of firms and the militancy of unions increase output? This paper studies this question in a dynamic general equilibrium model with nominal frictions and shows that these policies are expansionary when certain "emergency" conditions apply. I argue that these emergency conditions-zero interest rates and deflation-were satisfied during the Great Depression in the United States. Therefore, the New Deal, which facilitated monopolies and union militancy, was expansionary, according to the model. This conclusion is contrary to the one reached by Cole and Ohanian, who argue that the New Deal was contractionary. The main reason for this divergence is that the current model incorporates nominal frictions so that inflation expectations play a central role in the analysis. The New Deal has a strong effect on inflation expectations in the model, changing excessive deflation to modest inflation, thereby lowering real interest rates and stimulating spending.

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Bibliographic Info

Paper provided by Federal Reserve Bank of New York in its series Staff Reports with number 264.

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Date of creation: 2006
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Handle: RePEc:fip:fednsr:264

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Keywords: Financial crises ; Depressions ; Inflation (Finance) ; Economic forecasting;

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  1. Obama, Abe, Roosevelt: ecco perché aumentare i salari combatte la recessione
    by keynesblog in Keynes Blog on 2014-02-14 14:49:01
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Cited by:
  1. Markus Hoermann & Andreas Schabert, 2013. "A Monetary Analysis of Balance Sheet Policies," Working Paper Series in Economics, University of Cologne, Department of Economics 68, University of Cologne, Department of Economics.
  2. Kiley, Michael T., 2014. "Policy Paradoxes in the New Keynesian Model," Finance and Economics Discussion Series, Board of Governors of the Federal Reserve System (U.S.) 2014-29, Board of Governors of the Federal Reserve System (U.S.).
  3. Michael Kumhof & Dirk Muir & Carlos de Resende & Jan in ‘t Veld & René Lalonde & Davide Furceri & Annabelle Mourougane & John Roberts & Stephen Snudden & Mathias Trabandt & Günter Coenen &, 2010. "Effects of Fiscal Stimulus in Structural Models," IMF Working Papers 10/73, International Monetary Fund.
  4. Andrea Raffo & Andrea Ferrero & Gauti Eggertsson, 2013. "Structural Reforms in a Monetary Union: The Role of the ZLB," 2013 Meeting Papers, Society for Economic Dynamics 637, Society for Economic Dynamics.
  5. Frederic S. Mishkin, 2011. "Over the Cliff: From the Subprime to the Global Financial Crisis," Journal of Economic Perspectives, American Economic Association, vol. 25(1), pages 49-70, Winter.
  6. Alan J. Auerbach & William G. Gale, 2009. "Activist fiscal policy to stabilize economic activity," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, Federal Reserve Bank of Kansas City, pages 327-374.
  7. Matthew Denes & Gauti B. Eggertsson, 2009. "A Bayesian approach to estimating tax and spending multipliers," Staff Reports, Federal Reserve Bank of New York 403, Federal Reserve Bank of New York.
  8. Eggertsson, Gauti & Ferrero, Andrea & Raffo, Andrea, 2014. "Can structural reforms help Europe?," Journal of Monetary Economics, Elsevier, Elsevier, vol. 61(C), pages 2-22.
  9. Pierpaolo Benigno, 2009. "New-Keynesian Economics: An AS-AD View," NBER Working Papers 14824, National Bureau of Economic Research, Inc.
  10. Price V. Fishback & John Joseph Wallis, 2012. "What Was New About the New Deal?," NBER Working Papers 18271, National Bureau of Economic Research, Inc.
  11. Daniel Leigh, 2009. "Monetary Policy and the Lost Decade," IMF Working Papers 09/232, International Monetary Fund.
  12. Gauti B. Eggertsson, 2010. "A Reply to Steven Horwitz's Commentary on "Great Expectations and the End of the Depression"," Econ Journal Watch, Econ Journal Watch, vol. 7(3), pages 197-204, September.

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