Business Cycles Flashcards
List major recessions of interwar
1920-21 1929-32 Less major: 1937-38 recession 1926 General strike recession
Business cycle volatility in interwar?
Higher SD of detrended GDP growth than before/after (Artis et al)
Why more volatile growth in interwar?
Solomou: Adjustment mechanisms are disrupted.
Solomou: which adjustment mechanisms other than real ER misalignment are disrupted?
Labour migration restricted: Over 2% of LF/ year prewar to 0.2% 1930s
Trade (stops X led recoveries) and overseas lending collapse 1930s
UK/US business cycle correlation?
1880-1913: 0.22
1920-39: 0.46
Becomes statistically significant at 10% level
What is hysteresis?
The path an economy takes matters
Multiple possible long run equilibria, with short run outcomes determining which is reached.
1920-21: Macro stats?
1921:
Ue=11.3
IP down 20
X down 30
1920-21: Demand or supply side mostly
CPI=-9.7 indicates demand side explainations dominate supply side
1920-21 hysteresis?
Yes. Output did not return to prewar trends.
Coal strike as a shock causing 1920-21
Mitchell, Solomou, Weale (2002): Monthly GDP fell 25%. Coal rationing and increase in factor prices
Recovery timing is consistent with this
Demand side 1920-21?
Contractionary MP
Fiscal Policy
N/S divide 1920-21?
Massively worsened: Export oriented north.
Decline exacerbated the trade hysteresis of changing production in WW1
Announcement to rejoin prewar parity?
1919 Cunliffe report
Impact of raising IR on trade?
Solomou 1996: Real ER determined rapidly in SR (money markets) as attracts money in!
Overshooting of increased real ER leads to NCF in and so negative trade effects
Raise of ir 1919 to 1921
5 - 7
Fiscal policy as a cause of 1920-21?
War was financed through bond issue: Nat debt at 180% GDP and Nat debt interest at 7% GDP.
Spend down and tax up post war (especially on capital)
Why not solely FP
Timing wrong: No recession until 20/21, rather than 19.
But still a major recessionary force
Persistence of 20/21?
Unrecoverable output gap. Still at 3% by 1937.
Other factors, including electricity as a GPT, may have skewed this figure (as it affects long run growth paths)
Persistent impact of 20/21 on trade?
Solomou and Vartis: Import ratio (% GDP) up indicates a permanent adverse GDP effect.
Permanently raised by 4%
Kitson and Solomou (1990): Persistently high until collapse of global trade can better explain the fall!!
Unintended positive of 1920-21 contractionary MP?
Solomou (1996): Contractionary MP of 1920s allayed inflation fears, allowing for successful expansionary MP post devaluation!
Inverse relationship of 1920s and 1930s growth.
But, Bateman: Why not growth in both?
Great depression international?
GDP down: US 28 FR 11 GER 16 UK 6
List causes of GD (3)
Export shocks
Investment and Fiscal policy
Monetary shocks
Describe the 1929-31 Export shock?
Why was this so big for Britain
Britain had large (X/Y) ratio
X fell 302m greater than the total fall in Y (246m) (Feinstein 1972)
G and C actually rose!
Collapse in agricultural prices and incomes led to collapse of trade with global south: 60% of trade was with empire!
How did I and FP contribute to GD?
1931-3: 87% fall in I (Feinstein 1972)
Due to both IR up and confidence down
‘balanced budget targetting’
Monetary shocks causing GD?
1929- BoE had to match Fed MP contraction: Fixed currency leads to loss of monetary autonomy
1931- Speculation against sterling so had to raise IR to remain committed
Why was UK GD mild (2)
No financial crisis
Policy intervention
UK mild GD: Financial crises
Bailed out by BoE (Accominotti 2016): liquidity provision and negotiated to freeze loans
(Grossman 1994): If crisis: GDP down 13%, compared to 5% if not. Also quicker recovery.
UK mild GD: policy (monetary)
1931: Leave gold standard and so MP freedom, but didn’t know what to do with it/ scared? (Solomou)
Lennard (2018): Deval effect on uncertainty so short run bad?
Devaluers saw smaller fall in IP and recovery by 1934. But, Solomou: this doesn’t extend to GDP!
GD persistence?
Little evidence for this! Mean growth 1929-37 == 1920s
Some Ue persistence though!
Other countries had far higher persistence: US did not return to peak IP pre WW2
