The End of the Great Depression 1939-41: Policy Contributions and Fiscal Multipliers
This paper is about the size of fiscal multipliers and the sources of recovery from the Great Depression. Its baseline result is that 89.1 percent of the 1939:Q1-1941:Q4 recovery can be attributed to fiscal policy innovations, 34.1 percent to monetary policy innovations and the remaining -23.2 percent to the combined effect of the basic VAR dynamic forecast and innovations in non-government components of GDP. Traditional Keynesian multipliers assume that there are no capacity constraints to impede a fiscal-driven expansion in aggregate demand. On the contrary, we find ample evidence of capacity constraints in 1941, particularly in the second half of that year. As a result our preferred government spending multiplier is 1.80 when the time period ends in 1941:Q2 but only 0.88 when the time period ends in supply-constrained 1941:Q4. Only the 1.80 multiplier is relevant to situations like 2009-10 when capacity constraints are absent across the economy. Two sets of new insights emerge from a review of contemporary print media. We document that the American economy went to war starting in June 1940, fully 18 months before Pearl Harbor. We also detail the bifurcated nature of the 1941 economy, with excess capacity in its labor market but capacity constraints in many of the key manufacturing industries. By July 1941, the American economy was in a state of perceived national emergency.
|Date of creation:||Sep 2010|
|Date of revision:|
|Contact details of provider:|| Postal: |
Web page: http://www.nber.org
More information through EDIRC
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Chow, Gregory C & Lin, An-loh, 1971.
"Best Linear Unbiased Interpolation, Distribution, and Extrapolation of Time Series by Related Series,"
The Review of Economics and Statistics,
MIT Press, vol. 53(4), pages 372-75, November.
- Tom Doan, . "CHOWLIN: RATS procedure to distribute a series to a higher frequency using related series," Statistical Software Components RTS00036, Boston College Department of Economics.
- Tom Doan, . "DISAGGREGATE: RATS procedure to implement general disaggregation (interpolation/distribution) procedure," Statistical Software Components RTS00050, Boston College Department of Economics.
- Lawrence Christiano & Martin Eichenbaum & Sergio Rebelo, 2009.
"When is the government spending multiplier large?,"
NBER Working Papers
15394, National Bureau of Economic Research, Inc.
- Gauti B. Eggertsson, 2005.
"Great expectations and the end of the depression,"
234, Federal Reserve Bank of New York.
- Robert E. Hall, 2009.
"By How Much Does GDP Rise If the Government Buys More Output?,"
Brookings Papers on Economic Activity,
Economic Studies Program, The Brookings Institution, vol. 40(2 (Fall)), pages 183-249.
- Robert E. Hall, 2009. "By How Much Does GDP Rise if the Government Buys More Output?," NBER Working Papers 15496, National Bureau of Economic Research, Inc.
- 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.
- Valerie A. Ramey, 2009. "Identifying Government Spending Shocks: It's All in the Timing," NBER Working Papers 15464, National Bureau of Economic Research, Inc.
- Harold L. Cole & Lee E. Ohanian, 2004.
"New Deal Policies and the Persistence of the Great Depression: A General Equilibrium Analysis,"
Journal of Political Economy,
University of Chicago Press, vol. 112(4), pages 779-816, August.
- Harold L. Cole & Lee E. Ohanian, 2001. "New Deal policies and the persistence of the Great Depression: a general equilibrium analysis," Working Papers 597, Federal Reserve Bank of Minneapolis.
When requesting a correction, please mention this item's handle: RePEc:nbr:nberwo:16380. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ()
If references are entirely missing, you can add them using this form.