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Can Great Depression Theories Explain the Great Recession?

  • Schlenkhoff, Georg
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    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.

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    File URL: http://mpra.ub.uni-muenchen.de/19781/1/MPRA_paper_19781.pdf
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    Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 19781.

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    Date of creation: 24 Nov 2009
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    Handle: RePEc:pra:mprapa:19781
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    1. John Van Reenen & Nick Bloom & Steve Bond, 2006. "Uncertainty and investment dynamics," LSE Research Online Documents on Economics 2645, London School of Economics and Political Science, LSE Library.
    2. Nicholas Bloom & Max Floetotto & Nir Jaimovich & Itay Saporta-Eksten & Stephen J. Terry, 2014. "Really Uncertain Business Cycles," Working Papers 14-18, Center for Economic Studies, U.S. Census Bureau.
    3. Frederic S. Mishkin, 1990. "Asymmetric Information and Financial Crises: A Historical Perspective," NBER Working Papers 3400, National Bureau of Economic Research, Inc.
    4. 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.
    5. Ben S. Bernanke, 1983. "Non-Monetary Effects of the Financial Crisis in the Propagation of the Great Depression," NBER Working Papers 1054, National Bureau of Economic Research, Inc.
    6. Reinhart, Carmen, 2008. "Reflections on the International Dimensions and Policy Lessons of the U.S. Subprime Crisis," MPRA Paper 11863, University Library of Munich, Germany.
    7. Nicholas Bloom, 2007. "The Impact of Uncertainty Shocks," NBER Working Papers 13385, National Bureau of Economic Research, Inc.
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