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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. Vasco Cúrdia & Michael Woodford, 2008. "Credit frictions and optimal monetary policy," Working Paper Research 146, National Bank of Belgium.
  2. Harold L. Cole & Lee E. Ohanian, 2004. "New Deal Policies and the Persistence of the Great Depression: A General Equilibrium Analysis," Journal of Political Economy, University of Chicago Press, vol. 112(4), pages 779-816, August.
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Blog mentions

As found by EconAcademics.org, the blog aggregator for Economics research:
  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. Matthew Denes & Gauti B. Eggertsson, 2009. "A Bayesian approach to estimating tax and spending multipliers," Staff Reports 403, Federal Reserve Bank of New York.
  2. Price V. Fishback & John Joseph Wallis, 2012. "What Was New About the New Deal?," NBER Working Papers 18271, National Bureau of Economic Research, Inc.
  3. Kiley, Michael T., 2014. "Policy Paradoxes in the New Keynesian Model," Finance and Economics Discussion Series 2014-29, Board of Governors of the Federal Reserve System (U.S.).
  4. 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, pages 327-374.
  5. 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.
  6. Pierpaolo Benigno, 2009. "New-Keynesian Economics: An AS-AD View," NBER Working Papers 14824, National Bureau of Economic Research, Inc.
  7. Daniel Leigh, 2009. "Monetary Policy and the Lost Decade," IMF Working Papers 09/232, International Monetary Fund.
  8. Frederic S. Mishkin, 2010. "Over The Cliff: From the Subprime to the Global Financial Crisis," NBER Working Papers 16609, National Bureau of Economic Research, Inc.
  9. Markus Hoermann & Andreas Schabert, 2013. "A Monetary Analysis of Balance Sheet Policies," Working Paper Series in Economics 68, University of Cologne, Department of Economics.
  10. Andrea Raffo & Andrea Ferrero & Gauti Eggertsson, 2013. "Structural Reforms in a Monetary Union: The Role of the ZLB," 2013 Meeting Papers 637, Society for Economic Dynamics.
  11. Eggertsson, Gauti & Ferrero, Andrea & Raffo, Andrea, 2014. "Can structural reforms help Europe?," Journal of Monetary Economics, Elsevier, vol. 61(C), pages 2-22.
  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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