Business Cycles

Question 1

List major recessions of interwar

Answer 1

1920-21
1929-32
Less major: 
1937-38 recession
1926 General strike recession

Question 2

Business cycle volatility in interwar?

Answer 2

Higher SD of detrended GDP growth than before/after (Artis et al)

Question 3

Why more volatile growth in interwar?

Answer 3

Solomou: Adjustment mechanisms are disrupted.

Question 4

Solomou: which adjustment mechanisms other than real ER misalignment are disrupted?

Answer 4

Labour migration restricted: Over 2% of LF/ year prewar to 0.2% 1930s
Trade (stops X led recoveries) and overseas lending collapse 1930s

Question 5

UK/US business cycle correlation?

Answer 5

1880-1913: 0.22
1920-39: 0.46
Becomes statistically significant at 10% level

Question 6

What is hysteresis?

Answer 6

The path an economy takes matters

Multiple possible long run equilibria, with short run outcomes determining which is reached.

Question 7

1920-21: Macro stats?

Answer 7

1921:
Ue=11.3
IP down 20
X down 30

Question 8

1920-21: Demand or supply side mostly

Answer 8

CPI=-9.7 indicates demand side explainations dominate supply side

Question 9

1920-21 hysteresis?

Answer 9

Yes. Output did not return to prewar trends.

Question 10

Coal strike as a shock causing 1920-21

Answer 10

Mitchell, Solomou, Weale (2002): Monthly GDP fell 25%. Coal rationing and increase in factor prices

Recovery timing is consistent with this

Question 11

Demand side 1920-21?

Answer 11

Contractionary MP

Fiscal Policy

Question 12

N/S divide 1920-21?

Answer 12

Massively worsened: Export oriented north.

Decline exacerbated the trade hysteresis of changing production in WW1

Question 13

Announcement to rejoin prewar parity?

Answer 13

1919 Cunliffe report

Question 14

Impact of raising IR on trade?

Answer 14

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

Question 15

Raise of ir 1919 to 1921

Answer 15

5 - 7

Question 16

Fiscal policy as a cause of 1920-21?

Answer 16

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)

Question 17

Why not solely FP

Answer 17

Timing wrong: No recession until 20/21, rather than 19.

But still a major recessionary force

Question 18

Persistence of 20/21?

Answer 18

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)

Question 19

Persistent impact of 20/21 on trade?

Answer 19

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!!

Question 20

Unintended positive of 1920-21 contractionary MP?

Answer 20

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?

Question 21

Great depression international?

Answer 21

GDP down:
US 28
FR 11
GER 16
UK 6

Question 22

List causes of GD (3)

Answer 22

Export shocks
Investment and Fiscal policy
Monetary shocks

Question 23

Describe the 1929-31 Export shock?

Why was this so big for Britain

Answer 23

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!

Question 24

How did I and FP contribute to GD?

Answer 24

1931-3: 87% fall in I (Feinstein 1972)
Due to both IR up and confidence down
‘balanced budget targetting’

Question 25

Monetary shocks causing GD?

Answer 25

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

Question 26

Why was UK GD mild (2)

Answer 26

No financial crisis

Policy intervention

Question 27

UK mild GD: Financial crises

Answer 27

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.

Question 28

UK mild GD: policy (monetary)

Answer 28

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!

Question 29

GD persistence?

Answer 29

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