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Fiscal Policy in a Depressed Economy: Was There a 'Free Lunch' in 1930s' Britain?

  • Crafts, Nicholas
  • Mills, Terence C

We report estimates of the fiscal multiplier for interwar Britain based on quarterly data and time-series econometrics. We find that the government-expenditure multiplier was in the range 0.3 to 0.9 even during the period when interest rates were at the lower bound. The scope for a 'Keynesian solution' to recession was much less than is generally supposed. In the later 1930s but not before Britain's exit from the gold standard, there was a 'fiscal free lunch' in the sense that deficit-financed government spending would have improved public finances enough to pay for the interest onthe extra debt.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 9273.

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Date of creation: Jan 2013
Date of revision:
Handle: RePEc:cpr:ceprdp:9273
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  1. Shafik Hebous, 2011. "The Effects Of Discretionary Fiscal Policy On Macroeconomic Aggregates: A Reappraisal," Journal of Economic Surveys, Wiley Blackwell, vol. 25(4), pages 674-707, 09.
  2. Valerie A. Ramey, 2011. "Identifying Government Spending Shocks: It's all in the Timing," The Quarterly Journal of Economics, Oxford University Press, vol. 126(1), pages 1-50.
  3. Ilzetzki, Ethan & Mendoza, Enrique G. & Végh, Carlos A., 2013. "How big (small?) are fiscal multipliers?," Journal of Monetary Economics, Elsevier, vol. 60(2), pages 239-254.
  4. Robert J. Barro & Charles J. Redlick, 2009. "Macroeconomic Effects from Government Purchases and Taxes," NBER Working Papers 15369, National Bureau of Economic Research, Inc.
  5. Alan J. Auerbach & Yuriy Gorodnichenko, 2012. "Fiscal Multipliers in Recession and Expansion," NBER Chapters, in: Fiscal Policy after the Financial Crisis, pages 63-98 National Bureau of Economic Research, Inc.
  6. Laura Jaramillo & Carlo Cottarelli, 2012. "Walking Hand in Hand: Fiscal Policy and Growth in Advanced Economies," IMF Working Papers 12/137, International Monetary Fund.
  7. Crafts, Nicholas, 2012. "UK Defence News, 1920-1938: Estimates Based on Contemporary Sources," CAGE Online Working Paper Series 104, Competitive Advantage in the Global Economy (CAGE).
  8. Valerie A. Ramey, 2012. "Government Spending and Private Activity," NBER Working Papers 17787, National Bureau of Economic Research, Inc.
  9. Roger Middleton, 2010. "British monetary and fiscal policy in the 1930s," Oxford Review of Economic Policy, Oxford University Press, vol. 26(3), pages 414-441, Autumn.
  10. Boyer, George R. & Hatton, Timothy J., 2002. "New Estimates Of British Unemployment, 1870 1913," The Journal of Economic History, Cambridge University Press, vol. 62(03), pages 643-675, September.
  11. Oliver Röhn, 2010. "New Evidence on the Private Saving Offset and Ricardian Equivalence," OECD Economics Department Working Papers 762, OECD Publishing.
  12. Dimsdale, Nicholas H & Horsewood, Nicholas, 1995. "Fiscal Policy and Employment in Interwar Britain: Some Evidence from a New Model," Oxford Economic Papers, Oxford University Press, vol. 47(3), pages 369-96, July.
  13. repec:oup:qjecon:v:114:y:1999:i:4:p:1399-1436 is not listed on IDEAS
  14. repec:oup:qjecon:v:117:y:2002:i:4:p:1329-1368 is not listed on IDEAS
  15. Roberto perotti, 2011. "Expectations and Fiscal Policy: An Empirical Investigation," Working Papers 429, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
  16. Jocelyn Boussard & Francisco de Castro & Matteo Salto, 2012. "Fiscal Multipliers and Public Debt Dynamics in Consolidations," European Economy - Economic Papers 460, Directorate General Economic and Financial Affairs (DG ECFIN), European Commission.
  17. Mark Thomas, 1983. "Rearmament and Economic Recovery in the late 1930S," Economic History Review, Economic History Society, vol. 36(4), pages 552-579, November.
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