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Was the New Deal Contractionary?

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  • Gauti B. Eggertsson

    (Federal Reserve Bank of New York)

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 (2004), 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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Paper provided by Society for Economic Dynamics in its series 2007 Meeting Papers with number 660.

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Date of creation: 2007
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Handle: RePEc:red:sed007:660

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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. 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.
  2. Pierpaolo Benigno, 2009. "New-Keynesian Economics: An AS-AD View," NBER Working Papers 14824, National Bureau of Economic Research, Inc.
  3. Price V. Fishback & John Joseph Wallis, 2012. "What Was New About the New Deal?," NBER Working Papers 18271, National Bureau of Economic Research, Inc.
  4. 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.
  5. G�nter Coenen & Christopher J. Erceg & Charles Freedman & Davide Furceri & Michael Kumhof & Ren� Lalonde & Douglas Laxton & Jesper Lind� & Annabelle Mourougane & Dirk Muir & Susanna Mursula & Ca, 2012. "Effects of Fiscal Stimulus in Structural Models," American Economic Journal: Macroeconomics, American Economic Association, vol. 4(1), pages 22-68, January.
  6. 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.
  7. 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.
  8. Eggertsson, Gauti & Ferrero, Andrea & Raffo, Andrea, 2014. "Can structural reforms help Europe?," Journal of Monetary Economics, Elsevier, vol. 61(C), pages 2-22.
  9. Matthew Denes & Gauti B. Eggertsson, 2009. "A Bayesian approach to estimating tax and spending multipliers," Staff Reports 403, Federal Reserve Bank of New York.
  10. 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.).
  11. Daniel Leigh, 2009. "Monetary Policy and the Lost Decade," IMF Working Papers 09/232, International Monetary Fund.
  12. Markus Hoermann & Andreas Schabert, 2013. "A Monetary Analysis of Balance Sheet Policies," Working Paper Series in Economics 68, University of Cologne, Department of Economics.

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