1930s Recovery

Question 1

Natural Recovery as a suggestion?

Answer 1

1930s: 4% / annum
Richardson 1967: Market forces, rather than government policy led to recovery.
Overall, policy along with natural forces led to recovery

Question 2

New industries driving recovery?

Answer 2

Chemicals/motor vehicles etc
Broadberry and Crafts (1990): They were 22.1% of manufacturing, but 37.5% growth!
Not enough to explain 4% / annum though!

Question 3

New development block driving recovery?

Answer 3

New industries formed a self contained block which drove growth for all industries
Von Tunzelmann: counterfactual: Output only falls 2.9% total 1930-35 if no growth of new industries.

Question 4

Building boom driving recovery?

Answer 4

Mid 1930s vs late 1920s: 250k houses / year vs 125k
2.7m houses built in 1930s
Solomou 1996: 1932-4 Housing as 3% of GDP, but 17% of growth!

Question 5

Policy influence on Building Boom?

Answer 5

IR down leads to I up (Broadberry 1987)
V. elastic investment elasticities for housing: 1.1 vs 0.1 for others
Also, planning laws/ rent control down

Question 6

GPT driving recovery? Yes

Answer 6

Steam/ electricity: USA TFP doubled from prewar to interwar as a result of diffusion of electricity

Question 7

GPT evidence?

Answer 7

Solomou: Lack of evidence for slowdown as resources diverted to R and D as would be expected for GPT
Jovanovic and Rousseau (2005): GPTs have a large lag effect on growth

Difficult to conclude, but France also had same electric potential without recovery so cannot be sufficient!

Question 8

When did Britain devalue its currency, leaving the gold standard?

Answer 8

September 1931

Question 9

Why devalue?

Answer 9

Speculation led to diminish reserves to defend, leading to no other choice.

Question 10

Mechanisms for devaluation to aid recovery?

Answer 10

MP flexibility, real wages, NX, Tobin’s Q

Question 11

MP flexibility due to devaluation

Answer 11

i set at 2% throughout most of 1930s (far lower than 1920s)
Solves policy trilemma
r<0 as pi e greater than zero

Question 12

RW impact of devaluation

Answer 12

Theory: deval so inflation so RW growth down
Eichengreen and Sachs 1985 observe this correlation.
However, if GDP deflator, rather than wholesale prices are used, no correlation

Question 13

Impact of deval on NX

Answer 13

Stimulates X (correlation: EandS 1985)
1931-32: 13% deval led to 80m improvement in BoT (Broadberry)
Considering mult of 1.75 (actually likely higher e.g. Albers 2019: 2.2), 3% GDP growth

Question 14

Redmond vs Dimsdale on growth

Answer 14

Redmond: Only impact effect: Change in RER eroded due to inflation by 1936
Dimsdale (1981): Permanent effect on trade through taking market share leads to Eos and so sustains

Question 15

Trade as major channel?

Answer 15

Doubtful as NX as %GDP never recovered to 1929 level.

Question 16

Tobin’s Q

Answer 16

Price level targetting by gov (1932 budget): Wholesale»retail price increases.
Available funds for I
Unprecedented wealth/income ratio of over 6!

Question 17

Empirics for impact of deval?

Answer 17

EandS 1985: Deval correlated with growth and less fall in IP: 1929-32 8.8% vs 28.2% (Eichengreen 1991)
But, insufficient 10 country sample size
Consider Reinhart and Reinhart 2009: Add L America to reach 39 countries: No relationship!

Question 18

Overall conclusion on devaluation (before considering pi e impact)

Answer 18

Broadberry (1986): 3% GDP. Significant, but can’t explain extended recovery into the late 30s which was observed

Question 19

Why is policy regime change significant?

Answer 19

Greater effects of MP due to shifting inflation expectations.
It affects MP transmission!

Question 20

Overall conclusion on policy regime change?

Answer 20

Coherent policy shift: 1933 due to learning paths (consistent with Lee and O’Rouke 2020 30 country study), meaning it helped sustain, but not cause the recovery

Question 21

Immediate impact of MP change possible/did it happen?

Answer 21

Temin (1989): Deval could in theory immediately shift inflation expc.
Learning, rather than rational expc: No immediate shift to expc, unlike US
Ellison (2020): Early devaluers reluctant to engage in open market operations

Question 22

Immediate impact of MP change? NO!

Answer 22

Devaluation was forced, rather than intentionally expansionary so unlikely to immediately stim economy.
We observe double dip: no real recovery pre Aug 1932

Question 23

Price level targetting after devaluation?

Answer 23

1932 Ottawa conference.

Aim for PL up, cheap money, weak pound…

Question 24

Ensure confidence maintained despite expansionary Mp?

Answer 24

Booth (1987): ‘managed economy approach’

Necessary to allay fears of runaway inflation. Balanced budgets!

Question 25

Did policy shift occur?

Answer 25

Yes: Mitchell, Solomou, Weale 2012: Strong recovery vs the rest of world/history

Question 26

Evidence policy regime shift occurred 1933?

Answer 26

Lennard, Meinecke, Solomou (2021)
Analysis of financial press, bond term premia (3vs10 years), spot vs futures markets.
Aggregate of 3 finds pi e jumps in 1933

Question 27

Impact of pi e jump 1933

Answer 27

Capie and Weber 2010: r<0 in 1933

Question 28

Public debt as % GDP long term

Answer 28

Buiter 1985: 50% prewar to 200% interwar to 150% pre ww2

Question 29

Constant Employment Budget Surplus (CEBS)

Answer 29

Proposed by Middleton 1981
Hold Y constatnt at 1929 level
Finds 4% contraction on GDP by 1934

Question 30

Against CEBS?

Answer 30

Broadberry (1984): ‘fiscal leverage model’

The large nature of price changes mean accounting for this, FP was fairly neutral

Question 31

Fiscal multiplier: theoretical determinants?

Answer 31

=0 if floating e, k flows perfect.

Can crowd out: NX, I, C (Ricardian Equivalence)

Question 32

Fiscal Multiplier estimates?

Answer 32

Hatton 1987: 1.25-1.75
Broadberry 1984: 1.22
Dimsdale and Horsewood 1995: SR 1.5, LR 2.5

Question 33

Why are other fiscal multiplier estimates wrong?

Answer 33

Crafts and Mills 2013: They ignore the endogeneity of fiscal stance wrt state of the economy

Question 34

Crafts and Mills multiplier?

Answer 34

CandM 2013: Consider defence spending as exogenous source of gov spend, not endogenous to state of the economy.
0.3-0.8 (NX crowded out) / fears about high levels of public debt.
This justifies MP usage over FP?

Question 35

CandM multiplier important to note

Answer 35

Bateman argues: Focus of rearmament on depressed regions of North could make it more important LR than just the multiplier!
Focus on post 1932 recession so lower mult as not in recession?!

Question 36

Multiplier of (exogenous) tax changes?

Answer 36

Cloyne, Dimsdale and Postel-Vinnay (2018)
0.7 in Q1, >2 in Q8
Thus, FP of tax cuts as a missed opportunity?!

Question 37

Deval percent of GDP growth

Answer 37

Lennard meinecke solomou (2021) 36% GDP