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The Great Recession vs. the Great Depression: Stylized facts on siblings that were given different foster parents

  • Aiginger, Karl

This paper compares the depth of the recent crisis and the Great Depression. We use a new data set to compare the drop in activity in the industrialized countries for seven activity indicators. This is done under the assumption that the recent crisis leveled off in mid-2009 for production and will do so for unemployment in 2010. Our data indicate that the recent crisis indeed had the potential to be another Great Depression, as shown by the speed and simultaneity of the decline in the first nine months. However, if we assume that a large second dip can be avoided, the drop in all indicators will have been smaller than during the Great Depression. This holds true specifically for GDP, employment and prices, and least for manufacturing output. The difference in the depth in the crises concurs with differences in policy reaction. This time monetary policy and fiscal policy were applied courageously, speedily and partly internationally coordinated. During the Great Depression for several years fiscal policy tried to stabilize budgets instead of aggregate demand, and either monetary policy was not applied or was rather ineffective insofar as deflation turned lower nominal interest rates into higher real rates. Only future research will be able to prove the exact impact of economic policy, but the current tentative conclusion is that economic policy prevented the recent crisis from developing into a second Great Depression. This is also a partial vindication for economists. The majority of them might not have been able to predict the crisis, but the science did learn its lesson from the Great Depression and was able to give decent policy advice to at least limit the depth of the recent crisis.

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File URL: http://dx.doi.org/10.5018/economics-ejournal.ja.2010-18
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File URL: http://econstor.eu/bitstream/10419/32773/1/626675979.pdf
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Article provided by Kiel Institute for the World Economy in its journal Economics: The Open-Access, Open-Assessment E-Journal.

Volume (Year): 4 (2010)
Issue (Month): ()
Pages: 1-41

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Handle: RePEc:zbw:ifweej:201018
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  1. Cogan, John F. & Cwik, Tobias & Taylor, John B. & Wieland, Volker, 2009. "New Keynesian versus old Keynesian government spending multipliers," CEPR Discussion Papers 7236, C.E.P.R. Discussion Papers.
  2. Eichengreen, Barry & Hatton, Tim, 1988. "Interwar Unemployment in International Perspective," Institute for Research on Labor and Employment, Working Paper Series qt7bw188gk, Institute of Industrial Relations, UC Berkeley.
  3. John B. Taylor, 2009. "The Financial Crisis and the Policy Responses: An Empirical Analysis of What Went Wrong," NBER Working Papers 14631, National Bureau of Economic Research, Inc.
  4. Reinhart, Carmen M. & Rogoff, Kenneth, 2009. "The Aftermath of Financial Crises," CEPR Discussion Papers 7209, C.E.P.R. Discussion Papers.
  5. Miguel Almunia & Agustín Bénétrix & Barry Eichengreen & Kevin H. O'Rourke & Gisela Rua, 2010. "From Great Depression to Great Credit Crisis: similarities, differences and lessons," Economic Policy, CEPR;CES;MSH, vol. 25, pages 219-265, 04.
  6. Romer, Christina D., 1992. "What Ended the Great Depression?," The Journal of Economic History, Cambridge University Press, vol. 52(04), pages 757-784, December.
  7. Joseph Francois & Roman Stöllinger, 2009. "New Shades of Protectionism and the Role of Multinationals," FIW Policy Brief series 002, FIW.
  8. Jakob von Weizsäcker, 2009. "Estimating the size of the European stimulus packages," Policy Contributions 266, Bruegel.
  9. Karl Aiginger, 2009. "Strengthening the resilience of an economy," Intereconomics: Review of European Economic Policy, Springer, vol. 44(5), pages 309-316, September.
  10. Fritz Breuss & Serguei Kaniovski & Margit Schratzenstaller, 2009. "Macro-economic Effects of the Fiscal Stimulus Measures in Austria," Austrian Economic Quarterly, WIFO, vol. 14(4), pages 205-216, November.
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