1930s Recovery Flashcards
Natural Recovery as a suggestion?
1930s: 4% / annum
Richardson 1967: Market forces, rather than government policy led to recovery.
Overall, policy along with natural forces led to recovery
New industries driving recovery?
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!
New development block driving recovery?
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.
Building boom driving recovery?
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!
Policy influence on Building Boom?
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
GPT driving recovery? Yes
Steam/ electricity: USA TFP doubled from prewar to interwar as a result of diffusion of electricity
GPT evidence?
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!
When did Britain devalue its currency, leaving the gold standard?
September 1931
Why devalue?
Speculation led to diminish reserves to defend, leading to no other choice.
Mechanisms for devaluation to aid recovery?
MP flexibility, real wages, NX, Tobin’s Q
MP flexibility due to devaluation
i set at 2% throughout most of 1930s (far lower than 1920s)
Solves policy trilemma
r<0 as pi e greater than zero
RW impact of devaluation
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
Impact of deval on NX
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
Redmond vs Dimsdale on growth
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
Trade as major channel?
Doubtful as NX as %GDP never recovered to 1929 level.
Tobin’s Q
Price level targetting by gov (1932 budget): Wholesale»retail price increases.
Available funds for I
Unprecedented wealth/income ratio of over 6!
Empirics for impact of deval?
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!
Overall conclusion on devaluation (before considering pi e impact)
Broadberry (1986): 3% GDP. Significant, but can’t explain extended recovery into the late 30s which was observed
Why is policy regime change significant?
Greater effects of MP due to shifting inflation expectations.
It affects MP transmission!
Overall conclusion on policy regime change?
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
Immediate impact of MP change possible/did it happen?
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
Immediate impact of MP change? NO!
Devaluation was forced, rather than intentionally expansionary so unlikely to immediately stim economy.
We observe double dip: no real recovery pre Aug 1932
Price level targetting after devaluation?
1932 Ottawa conference.
Aim for PL up, cheap money, weak pound…
Ensure confidence maintained despite expansionary Mp?
Booth (1987): ‘managed economy approach’
Necessary to allay fears of runaway inflation. Balanced budgets!
Did policy shift occur?
Yes: Mitchell, Solomou, Weale 2012: Strong recovery vs the rest of world/history
Evidence policy regime shift occurred 1933?
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
Impact of pi e jump 1933
Capie and Weber 2010: r<0 in 1933
Public debt as % GDP long term
Buiter 1985: 50% prewar to 200% interwar to 150% pre ww2
Constant Employment Budget Surplus (CEBS)
Proposed by Middleton 1981
Hold Y constatnt at 1929 level
Finds 4% contraction on GDP by 1934
Against CEBS?
Broadberry (1984): ‘fiscal leverage model’
The large nature of price changes mean accounting for this, FP was fairly neutral
Fiscal multiplier: theoretical determinants?
=0 if floating e, k flows perfect.
Can crowd out: NX, I, C (Ricardian Equivalence)
Fiscal Multiplier estimates?
Hatton 1987: 1.25-1.75
Broadberry 1984: 1.22
Dimsdale and Horsewood 1995: SR 1.5, LR 2.5
Why are other fiscal multiplier estimates wrong?
Crafts and Mills 2013: They ignore the endogeneity of fiscal stance wrt state of the economy
Crafts and Mills multiplier?
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?
CandM multiplier important to note
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?!
Multiplier of (exogenous) tax changes?
Cloyne, Dimsdale and Postel-Vinnay (2018)
0.7 in Q1, >2 in Q8
Thus, FP of tax cuts as a missed opportunity?!
Deval percent of GDP growth
Lennard meinecke solomou (2021) 36% GDP
