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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. Ilzetzki, Ethan & Mendoza, Enrique G. & Végh, Carlos A., 2013. "How big (small?) are fiscal multipliers?," Journal of Monetary Economics, Elsevier, vol. 60(2), pages 239-254.
  2. Chambers, David, 2010. "Going public in interwar Britain," Financial History Review, Cambridge University Press, vol. 17(01), pages 51-71, April.
  3. 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.
  4. 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.
  5. Karel Mertens & Morten O. Ravn, 2012. "Empirical Evidence on the Aggregate Effects of Anticipated and Unanticipated US Tax Policy Shocks," American Economic Journal: Economic Policy, American Economic Association, vol. 4(2), pages 145-81, May.
  6. 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.
  7. 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).
  8. Mark Thomas, 1983. "Rearmament and Economic Recovery in the late 1930S," Economic History Review, Economic History Society, vol. 36(4), pages 552-579, November.
  9. 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.
  10. Valerie A. Ramey, 2012. "Government Spending and Private Activity," NBER Working Papers 17787, National Bureau of Economic Research, Inc.
  11. Robert J. Barro & Charles J. Redlick, 2011. "Macroeconomic Effects From Government Purchases and Taxes," The Quarterly Journal of Economics, Oxford University Press, vol. 126(1), pages 51-102.
  12. Boyer, George R. & Hatton, Timothy J., 2002. "New Estimates Of British Unemployment, 1870 1913," The Journal of Economic History, Cambridge University Press, vol. 62(03), pages 643-675, September.
  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. Roberto Perotti, 1999. "Fiscal Policy In Good Times And Bad," The Quarterly Journal of Economics, MIT Press, vol. 114(4), pages 1399-1436, November.
  15. Oliver Röhn, 2010. "New Evidence on the Private Saving Offset and Ricardian Equivalence," OECD Economics Department Working Papers 762, OECD Publishing.
  16. 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.
  17. 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.
  18. 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.
  19. 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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