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Rearmament to the Rescue? New Estimates of the Impact of ‘Keynesian’ Policies in 1930s’ Britain

  • Nicholas Crafts

    ()

    (University of Warwick)

  • Terence C. Mills

    ()

    (Loughborough University)

We report estimates of the fiscal multiplier for interwar Britain based on quarterly data, time-series econometrics, and ‘defense news’. We find that the government expenditure multiplier was in the range 0.5 to 0.8, much lower than previous estimates. The scope for a Keynesian solution to recession was much lower than is generally supposed. We do find that rearmament gave a substantial boost to real GDP after 1935 but this was because the private sector responded to news of massive future defense spending and does not imply that the multiplier effect of temporary public works programs would have been large.

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File URL: http://ehes.org/EHES_No31.pdf
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Paper provided by European Historical Economics Society (EHES) in its series Working Papers with number 0031.

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Length: 26 pages
Date of creation: Nov 2012
Date of revision:
Handle: RePEc:hes:wpaper:0031
Contact details of provider: Web page: http://www.ehes.org

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  1. Robert J. Barro & Charles J. Redlick, 2009. "Macroeconomic Effects from Government Purchases and Taxes," NBER Working Papers 15369, National Bureau of Economic Research, Inc.
  2. Ethan Ilzetzki & Enrique G. Mendoza & Carlos A. Végh, 2010. "How Big (Small?) are Fiscal Multipliers?," CEP Discussion Papers dp1016, Centre for Economic Performance, LSE.
  3. Oliver Röhn, 2010. "New Evidence on the Private Saving Offset and Ricardian Equivalence," OECD Economics Department Working Papers 762, OECD Publishing.
  4. Karel Mertens & Morten Ravn, 2010. "Empirical Evidence on the Aggregate Effects of Anticipated and Unanticipated U.S. Tax Policy Shocks," NBER Working Papers 16289, National Bureau of Economic Research, Inc.
  5. Valerie A. Ramey, 2011. "Can Government Purchases Stimulate the Economy?," Journal of Economic Literature, American Economic Association, vol. 49(3), pages 673-85, September.
  6. 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).
  7. Lawrence Christiano & Martin Eichenbaum & Sergio Rebelo, 2011. "When Is the Government Spending Multiplier Large?," Journal of Political Economy, University of Chicago Press, vol. 119(1), pages 78 - 121.
  8. Chambers, David, 2010. "Going public in interwar Britain," Financial History Review, Cambridge University Press, vol. 17(01), pages 51-71, April.
  9. Roger Middleton, 2011. "Macroeconomic policy in Britain between the wars," Economic History Review, Economic History Society, vol. 64(3), pages i-xxxi, 08.
  10. Chadha, Jagjit S & Dimsdale, Nicholas H, 1999. "A Long View of Real Rates," Oxford Review of Economic Policy, Oxford University Press, vol. 15(2), pages 17-45, Summer.
  11. Valerie A. Ramey, 2012. "Government Spending and Private Activity," NBER Working Papers 17787, National Bureau of Economic Research, Inc.
  12. James Mitchell & Solomos Solomou & Martin Weale, 2011. "Monthly GDP Estimates for Inter-War Britain," CESifo Working Paper Series 3602, CESifo Group Munich.
  13. 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.
  14. Boyer, George & Hatton, Timothy J., 2001. "New Estimates of British Unemployment, 1870-1913," CEPR Discussion Papers 2814, C.E.P.R. Discussion Papers.
  15. Bowden, S. & Higgins, D.M. & Price, C., 2006. "A very peculiar practice: Underemployment in Britain during the interwar years," European Review of Economic History, Cambridge University Press, vol. 10(01), pages 89-108, April.
  16. 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.
  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.
  18. 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.
  19. 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.
  20. Roberto Perotti, 1999. "Fiscal Policy In Good Times And Bad," The Quarterly Journal of Economics, MIT Press, vol. 114(4), pages 1399-1436, November.
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