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Reflation and The Great Recovery: Concepts in the Air

Reflation and The Great Recovery: Concepts in the Air. Gold Standard Mindset . Keynesian Fiscal Stimulus. Monetary Ease. Self-correcting Mechanism. Inflation Expectations. Dynamic General Equilibrium. Multiple Equilibria. Negative Real Interest Rate. Liquidity Trap (ZLB).

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Reflation and The Great Recovery: Concepts in the Air

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  1. Reflation and The Great Recovery: Concepts in the Air Gold Standard Mindset Keynesian Fiscal Stimulus Monetary Ease Self-correcting Mechanism • Inflation Expectations Dynamic General Equilibrium Multiple Equilibria Negative Real Interest Rate Liquidity Trap (ZLB) Utility Maximization Animal Spirits New Deal Distortions Inter- temporal Substitution Real Wage

  2. Reflation and The Great Recovery: Contributors to Debate John Cassidy: Fiscal Fallacy Christina Romer: Money Matters Temin: Regime Change Evan Koenig Paul Krugman: It’s Baaack …Trapped Again Romer Eggertsson Krugman Expectations Rule Cole&Ohanian Eggertsson Duel’n’ DSGE Minsky Rapping Akerlof & Shiller Inherent Instability Cole & Ohanian Codd’l’n Interests Eichengreen Temin Bernanke Break’n’ Fetters

  3. Brad de Long: Liquidationist Argument • Speculation led to too much capital (or wrong capital) investment: “malinvestment” • Liquidate improper uses of capital and reallocate to other business sectors. • “The Depression could have been good medicine for the economy” • Let those who are going to fail… fail. • Hold tight and let the economy fix itself! • Recall Mellon’s mantra: Liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate. It will purge the rottenness out of the system. High costs of living and high living will come down. People will work harder, live a more moral life. Values will be adjusted, and enterprising people will pick up the wrecks from less competent people.

  4. Onset of the Depression: Persistent Deflation…Persistent Job Loss Manufacturing Employment $/pound DJIA

  5. Onset of the Depression: Bank Runs Deflationary Expectations

  6. FDR Inaugural Address … the only thing we have to fear is fear itself —nameless, unreasoning, unjustified terror which paralyzes needed efforts to convert retreat into advance…This Nation is asking for action, and action now. • A “New Deal”—A New Regime • 1932 • Reconstruction Finance Corp, Glass-Steagall (T-bonds back cash) • March/April 1933 • Loosened Fetters • Emergency Banking Act/Gold to Treasury • CCC and Reforestation Relief Act • May 1933 • AAA/Thomas Amendment (President & gold price/ • BoG & reserve requirement), TVA, Federal Securities Act • June 1933 • NIRA, Glass-Steagall FDIC • October-November 1933 • Commodity Credit Corp, Civil Works Administration • January 1934 • Gold Reserve Act : $ Devaluation: $20.67  $35/oz. • June 1934 • SEC, FSLIC • 1935 • WPA, REA, Wagner Act  NLRB • Schechter Poultry – NRA Franklin Delano Roosevelt President, 1933 – 1945

  7. $/pound Producer Price Index

  8. New Deal Reflation

  9. Fiscal and Monetary Stimulus…And Retrenchment Romer: Money not Spending

  10. Stimulus and Retrenchment: Recession in Depression

  11. The End of One Big Deflation Peter Temin and Barrie A. Wigmore

  12. Introduction • US recovery from the Great Depression in the second quarter of 1933—Roovelt’s Inauguration • Sargent’s (1983) regime change paradigm

  13. Recall Sargent • “the key to a costless stabilization was the establishment of a new policy regime” • “immediate effects were through rapidly revised expectations” • “changing expectations were the key to stabilization”

  14. Introduction • US recovery from the Great Depression in the second quarter of 1933—Roovelt’s Inauguration • Sargent’s (1983) regime change paradigm • Dollar devaluation was key to recovery...signaled change in policy regime and reversed expectations of deflation • Dispute Friedman and Schwartz who claim “the reopening of the banks was followed by a rapid spurt in personal income and industrial production” • Temin & Wigmore: National Industrial Recovery act anticipated higher costs and prices which led to a rise in the money supply • Romer, however, maintains that money growth mattered

  15. Before FDR • Hoover supported gold standard—devaluation was not an option • People expected continued contraction & deflation • The government’s monetary and fiscal policies warranted such expectations • Hoover focused on efforts to bolster credit markets rather than the economy directly • Hoover’s Reconstruction Finance Corporation Relief of financial institutions to promote investment • Recovery required a change in the policy regime--taking action FDR • That action was devaluation...taken soon after inauguration • Signaled the abandonment of the gold standard  expansionary effects on American industry

  16. Stock market as index of expectations • Stock prices rose because of expected inflation “change in expectations, therefore, stimulated business investment and expenditures on consumer durables, not consumption” • Rise in the demand for automobiles encouraged a rise in auto production, steel production, and industrial production • Grain and cotton prices rose as the value of the dollar fell  farmers had higher incomes • If Hoover had done what FDR did, the economy would have recovered earlier

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