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From Great Depression to Great Credit Crisis: Similarities, Differences and Lessons

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  • Miguel Almunia

    ()
    (Department of Economics, University of California, Berkeley)

  • Agustín S. Bénétrix

    ()
    (Institute for International Integration Studies, Trinity College Dublin)

  • Barry Eichengreen

    ()
    (Department of Economics, University of California, Berkeley)

  • Kevin H. O'Rourke

    ()
    (Institute for International Integration Studies, Trinity College Dublin
    Department of Economics, Trinity College Dublin)

  • Gisela Rua

    (Department of Economics, University of California, Berkeley)

Abstract

The Great Depression of the Thirties and the Great Credit Crisis of the "Noughties had similar causes but elicited strikingly different policy responses. It may still be too early to assess the effectiveness of current policy responses, but it is possible to analyze monetary and fiscal policies in the 1930s as a "natural experiment" or "counterfactual" capable of shedding light on the impact of recent policies. We employ vector autoregressions, instrumental variables, and qualitative evidence for a panel of 27 countries in the period 1925-1939. The results suggest that monetary and fiscal stimulus was effective – that where it did not make a difference it was not tried. The results also shed light on the debate over fiscal multipliers in episodes of financial crisis. They are consistent with multipliers at the higher end of those estimated in the recent literature, consistent with the idea that the impact of fiscal stimulus will be greater when banking system are dysfunctional and monetary policy is constrained by the zero bound.

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Bibliographic Info

Paper provided by IIIS in its series The Institute for International Integration Studies Discussion Paper Series with number iiisdp303.

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Length: 61 pages
Date of creation: Nov 2009
Date of revision:
Handle: RePEc:iis:dispap:iiisdp303

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