Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/28371 
Year of Publication: 
2009
Series/Report no.: 
Kiel Working Paper No. 1543
Publisher: 
Kiel Institute for the World Economy (IfW), Kiel
Abstract: 
This paper estimates a series of shocks to hit the US economy during the Great Depression, using a New Keynesian model with unemployment and bargaining frictions. Shocks to long-run inflation expectations appear to account for much of the cyclical behavior of employment, while an increase in labor's bargaining power also played an important role in deepening and lengthening the Depression. Government spending played very little role during the Hoover Administration and New Deal, until the rise in military spending effectively brought an end to the Depression in 1941. With the economy at or near the zero interest rate bound, interest rates and monetary aggregates provided a misleading indicator as to the true stance of inflation expectations; in fact, conditions were deflationary all throughout the 1930s in spite of high money growth and low interest rates. The experience of the 1930s offers lessons to modern policymakers who find themselves in a similar situation.
Subjects: 
Great Depression
expectations
deflation
zero bound
liquidity trap
JEL: 
E24
E31
E52
E65
Document Type: 
Working Paper

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