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From Great Depression to Great Credit Crisis: Similarities, Differences and Lessons

Miguel Almunia*, Agustín S. Bénétrix†, Barry Eichengreen*, Kevin H. O'Rourke† and Gisela Rua*
*: Department of Economics, University of California, Berkeley
†: Department of Economics and IIIS, Trinity College Dublin

This paper is produced as part of the project 'Historical Patterns of Development and Underdevelopment: Origins and Persistence of the Great Divergence (HI-POD),' a Collaborative Project funded by the European Commission's Seventh Research Framework Programme, Contract number 225342. Financial assistance was also received from the Coleman Fung Risk Management Center at the University of California, Berkeley. This paper could not have been written without the generosity of many colleagues who have shared their data with us. We are extremely grateful to Richard Baldwin, Giovanni Federico, Vahagn Galstyan, Mariko Hatase, Pierre-Cyrille Hautcoeur, William Hynes, Doug Irwin, Lars Jonung, Philip Lane, Sibylle Lehmann, Ilian Mihov, Emory Oakes, Albrecht Ritschl, Lennart Schön, Pierre Sicsic, Wim Suyker, Alan Taylor, Bryan Taylor, Gianni Toniolo, Irina Tytell, the staff at the National Library of Ireland, two anonymous referees, and the editor, Philippe Martin.

Abstract The Great Depression of the ‘Thirties and the Great Credit Crisis of the “Noughties had similar causes but elicited strikingly different policy responses.It may still be too early to assess the effectiveness of current policy responses, but it is possible to analyze monetary and fiscal policies in the 1930s as a “natural experiment” or “counterfactual” capable of shedding light on the impact of recent policies. We employ vector autoregressions, instrumental variables, and qualitative evidence for a panel of 27 countries in the period 1925-1939.The results suggest that monetary and fiscal stimulus was effective – that where it did not make a difference it was not tried.The results also shed light on the debate over fiscal multipliers in episodes of financial crisis.They are consistent with multipliers at the higher end of those estimated in the recent literature, consistent with the idea that the impact of fiscal stimulus will be greater when banking system are dysfunctional and monetary policy is constrained by the zero bound.


Last updated 28 August 2014 by IIIS (Email).