Great Expectations and the End of the Depression
48 Pages Posted: 5 Jan 2006
Date Written: December 2005
Abstract
This paper argues that the U.S. economy's recovery from the Great Depression was driven by a shift in expectations brought about by the policy actions of President Franklin Delano Roosevelt. On the monetary policy side, Roosevelt abolished the gold standard and - even more important - announced the policy objective of inflating the price level to pre-depression levels. On the fiscal policy side, Roosevelt expanded real and deficit spending. Together, these actions made his policy objective credible; they violated prevailing policy dogmas and introduced a policy regime change such as that described in work by Sargent and by Temin and Wigmore. The economic consequences of Roosevelt's policies are evaluated in a dynamic stochastic general equilibrium model with sticky prices and rational expectations.
Keywords: deflation, Great Depression, regime change, zero interest rates
JEL Classification: E52, E63
Suggested Citation: Suggested Citation
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