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The Great Recession vs. the Great Depression. Stylised Facts on Siblings that Were Given Different Foster Parents

  • Karl Aiginger

    (WIFO)

This paper compares the depth of the recent crisis and the Great Depression. We use a new data set, namely seven activity indicators, to compare the drop in activity in industrialised countries. This is done under the assumption that the recent crisis levelled off in mid-2009 for production and will do so for unemployment in 2010. Our data indicate that the recent crisis did indeed have the potential to turn into another Great Depression, as shown by the speed and simultaneity of the decline during the first nine months. However, if we assume that a large second dip can be avoided, the drop in all indicators overall will have been smaller than during the Great Depression. This holds true specifically for GDP, employment and prices, but is less true for manufacturing output. The difference in the depth of the crises reflects the differences in policy reaction. This time monetary policy and fiscal policy were applied courageously, speedily and were partly internationally coordinated. For several years during the Great Depression fiscal policy tried to stabilise budgets instead of aggregate demand, and either monetary policy was not applied or it was rather ineffective insofar as deflation turned lower nominal interest rates into higher real rates. Only future research will be able to prove the exact impact of economic policy, but the current tentative conclusion is that economic policy prevented the recent crisis from developing into a second Great Depression. This is also a partial vindication for economists. The majority of them might not have been able to predict the crisis, but it shows that the science did learn its lessons from the Great Depression and was able to give decent policy advice to at least limit the depth of the recent crisis.

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Paper provided by WIFO in its series WIFO Working Papers with number 354.

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Length: 28 pages
Date of creation: 14 Dec 2009
Date of revision:
Handle: RePEc:wfo:wpaper:y:2009:i:354
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  1. John F. Cogan & Tobias Cwik & John B. Taylor & Volker Wieland, 2009. "New Keynesian versus Old Keynesian Government Spending Multipliers," NBER Working Papers 14782, National Bureau of Economic Research, Inc.
  2. Romer, Christina D., 1992. "What Ended the Great Depression?," The Journal of Economic History, Cambridge University Press, vol. 52(04), pages 757-784, December.
  3. Karl Aiginger, 2009. "Strengthening the resilience of an economy," Intereconomics: Review of European Economic Policy, Springer, vol. 44(5), pages 309-316, September.
  4. Joseph Francois & Roman Stöllinger, 2009. "New Shades of Protectionism and the Role of Multinationals," FIW Policy Brief series 002, FIW.
  5. Miguel Almunia & Agustín S. Bénétrix & Barry Eichengreen & Kevin H. O'Rourke & Gisela Rua, 2009. "From Great Depression to Great Credit Crisis: Similarities, Differences and Lessons," NBER Working Papers 15524, National Bureau of Economic Research, Inc.
  6. Reinhart, Carmen M. & Rogoff, Kenneth S., 2009. "The Aftermath of Financial Crises," Scholarly Articles 11129155, Harvard University Department of Economics.
  7. Fritz Breuss & Serguei Kaniovski & Margit Schratzenstaller, 2009. "Macro-economic Effects of the Fiscal Stimulus Measures in Austria," Austrian Economic Quarterly, WIFO, vol. 14(4), pages 205-216, November.
  8. John B. Taylor, 2009. "The Financial Crisis and the Policy Responses: An Empirical Analysis of What Went Wrong," NBER Working Papers 14631, National Bureau of Economic Research, Inc.
  9. Eichengreen, Barry & Hatton, Tim, 1988. "Interwar Unemployment in International Perspective," Institute for Research on Labor and Employment, Working Paper Series qt7bw188gk, Institute of Industrial Relations, UC Berkeley.
  10. Jakob von Weizsäcker, 2009. "Estimating the size of the European stimulus packages," Policy Contributions 266, Bruegel.
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