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

  • Crafts, Nicholas

    (Department of Economics, University of Warwick)

  • Mills, Terence

    (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 0.3 to 0.8, much lower than previous estimates. The scope for a Keynesian solution to recession was less than is generally supposed. We find that rearmament gave a smaller boost to real GDP than previously claimed. Rearmament may, however, have had a larger impact than a temporary public works program of similar magnitude if private investment anticipated the need to add capacity to cope with future defense spending. JEL classification: E62 ; N14

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Paper provided by University of Warwick, Department of Economics in its series The Warwick Economics Research Paper Series (TWERPS) with number 1018.

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Date of creation: 2013
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Handle: RePEc:wrk:warwec:1018
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  1. Chambers, David, 2010. "Going public in interwar Britain," Financial History Review, Cambridge University Press, vol. 17(01), pages 51-71, April.
  2. Valerie A. Ramey, 2012. "Government Spending and Private Activity," NBER Chapters, in: Fiscal Policy after the Financial Crisis, pages 19-55 National Bureau of Economic Research, Inc.
  3. Mertens, Karel & Ravn, Morten O, 2009. "Empirical Evidence on the Aggregate Effects of Anticipated and Unanticipated U.S. Tax Policy Shocks," CEPR Discussion Papers 7370, C.E.P.R. Discussion Papers.
  4. Ethan Ilzetzki & Enrique G. Mendoza & Carlos A. Végh, 2010. "How Big (Small?) are Fiscal Multipliers?," CEP Discussion Papers dp1016, Centre for Economic Performance, LSE.
  5. 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.
  6. Mitchell, J. & Solomou, S. & Weale, M., 2011. "Monthly GDP Estimates for Inter-War Britain," Cambridge Working Papers in Economics 1155, Faculty of Economics, University of Cambridge.
  7. 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.
  8. 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.
  9. Boyer, George & Hatton, Timothy J., 2001. "New Estimates of British Unemployment, 1870-1913," CEPR Discussion Papers 2814, C.E.P.R. Discussion Papers.
  10. Roberto Perotti, 1999. "Fiscal Policy In Good Times And Bad," The Quarterly Journal of Economics, MIT Press, vol. 114(4), pages 1399-1436, November.
  11. Robert J. Barro & Charles J. Redlick, 2009. "Macroeconomic Effects from Government Purchases and Taxes," NBER Working Papers 15369, National Bureau of Economic Research, Inc.
  12. 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.
  13. 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.
  14. 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).
  15. Roger Middleton, 2011. "Macroeconomic policy in Britain between the wars," Economic History Review, Economic History Society, vol. 64(3), pages i-xxxi, 08.
  16. 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.
  17. Oliver Röhn, 2010. "New Evidence on the Private Saving Offset and Ricardian Equivalence," OECD Economics Department Working Papers 762, OECD Publishing.
  18. Mark Thomas, 1983. "Rearmament and Economic Recovery in the late 1930S," Economic History Review, Economic History Society, vol. 36(4), pages 552-579, November.
  19. 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.
  20. Valerie A. Ramey, 2011. "Can Government Purchases Stimulate the Economy?," Journal of Economic Literature, American Economic Association, vol. 49(3), pages 673-85, September.
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