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Can Great Depression Theories Explain the Great Recession?

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  • Schlenkhoff, Georg

Abstract

The recent recession has brought a sharp decrease in income, output, and world trade, as well as an increase in unemployment in developed and underdeveloped countries. Experts such as Paul Krugman, Christina Romer, or Barry Eichengreen, compare the current situation with the Great Depression of the 1930s. However, the current debate is whether that comparison is even applicable. Since policy makers have to understand the roots and the dimension of the crisis in order to seize the fiscal stimulus package, adjust the level of taxes, and change regulation of the financial sector, the debate is of course a reasonable one to have. The Great Depression is the archetype of a recession, so it provides policy makers with valuable insights into right and wrong reaction methods. However, if policy makers orientate at the Great Depression, they have to make sure that the roots of the crisis are similar. So this paper addresses the question: Is the current financial crisis similar to the Great Depression? For that purpose I will systematically compare the Great Recession with the Great Depression. First, by examining the theories that commonly explain the Great Depression. Subsequently I will apply these theories to the Great Recession and discuss if they are applicable. I will argue that some theories are still applicable. For example, which flaws in the monetary system contributed to the Great Recession as well as to the Great Depression? However, the economic environment has changed and applying the same policy reactions today as in the Great Depression will be a policy error. Finally I will briefly present policy recommendations that are based on the findings.

Suggested Citation

  • Schlenkhoff, Georg, 2009. "Can Great Depression Theories Explain the Great Recession?," MPRA Paper 19781, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:19781
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    File URL: https://mpra.ub.uni-muenchen.de/19781/1/MPRA_paper_19781.pdf
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    References listed on IDEAS

    as
    1. Nick Bloom & Stephen Bond & John Van Reenen, 2007. "Uncertainty and Investment Dynamics," Review of Economic Studies, Oxford University Press, vol. 74(2), pages 391-415.
    2. Nicholas Bloom & Max Floetotto & Nir Jaimovich & Itay Saporta-Eksten & Stephen J. Terry, 2012. "Really Uncertain Business Cycles," NBER Working Papers 18245, National Bureau of Economic Research, Inc.
    3. King, Gary & Rosen, Ori & Tanner, Martin & Wagner, Alexander F., 2008. "Ordinary Economic Voting Behavior in the Extraordinary Election of Adolf Hitler," The Journal of Economic History, Cambridge University Press, vol. 68(04), pages 951-996, December.
    4. Frederic S. Mishkin, 1991. "Asymmetric Information and Financial Crises: A Historical Perspective," NBER Chapters,in: Financial Markets and Financial Crises, pages 69-108 National Bureau of Economic Research, Inc.
    5. Nicholas Bloom, 2009. "The Impact of Uncertainty Shocks," Econometrica, Econometric Society, vol. 77(3), pages 623-685, May.
    6. Reinhart, Carmen, 2008. "Eight Hundred Years of Financial Folly," MPRA Paper 11864, University Library of Munich, Germany.
    7. Bernanke, Ben S, 1983. "Nonmonetary Effects of the Financial Crisis in Propagation of the Great Depression," American Economic Review, American Economic Association, vol. 73(3), pages 257-276, June.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    Great Depression; Great Recession; Crisis; Bretton Woods II; Fiscal Policy; Monetary Policy; Shocks;

    JEL classification:

    • E02 - Macroeconomics and Monetary Economics - - General - - - Institutions and the Macroeconomy
    • B10 - Schools of Economic Thought and Methodology - - History of Economic Thought through 1925 - - - General
    • B0 - Schools of Economic Thought and Methodology - - General
    • A23 - General Economics and Teaching - - Economic Education and Teaching of Economics - - - Graduate
    • A1 - General Economics and Teaching - - General Economics
    • B22 - Schools of Economic Thought and Methodology - - History of Economic Thought since 1925 - - - Macroeconomics
    • A2 - General Economics and Teaching - - Economic Education and Teaching of Economics
    • A10 - General Economics and Teaching - - General Economics - - - General
    • B15 - Schools of Economic Thought and Methodology - - History of Economic Thought through 1925 - - - Historical; Institutional; Evolutionary
    • A11 - General Economics and Teaching - - General Economics - - - Role of Economics; Role of Economists
    • B25 - Schools of Economic Thought and Methodology - - History of Economic Thought since 1925 - - - Historical; Institutional; Evolutionary; Austrian; Stockholm School
    • B12 - Schools of Economic Thought and Methodology - - History of Economic Thought through 1925 - - - Classical (includes Adam Smith)
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
    • B13 - Schools of Economic Thought and Methodology - - History of Economic Thought through 1925 - - - Neoclassical through 1925 (Austrian, Marshallian, Walrasian, Wicksellian)
    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
    • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles

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