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Great Expectations and the End of the Depression

Great Expectations and the End of the Depression. By Gaudi Eggertsson. What ended the Depression?. The Recovery was a result of a shift in expectations. Shift in expectations was spurred by a policy regime change.

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Great Expectations and the End of the Depression

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  1. Great Expectations and the End of the Depression By Gaudi Eggertsson

  2. What ended the Depression? • The Recovery was a result of a shift in expectations. • Shift in expectations was spurred by a policy regime change. • Policy regime change was the elimination of “dogmas” i.e. Gold standard, and other deflationary policies • Following the change demand was stimulated by low real interest rates and inflation expectations

  3. Government Policies (Dogmas) Hoover • Gold standard • Balanced Budget • Small Government • Tax increases to make up for loss of tax collection • Roosevelt • Elimination of the Gold Standard • Reflation • Low Real Interest Rates • Government Deficit

  4. Changing Expectations • After Roosevelt’s inauguration he stated that the prime goal was to reflate prices to pre- depression levels within 1-3 years • Roosevelt made it no secret what is goals were, often his quotes would show up in newspapers • Reflationary Quote from Roosevelt • “We are agreed in that our primary need is to insure an increase in the general level of commodity prices. To this end simultaneous actions must be taken both in the economic and the monetary fields.”

  5. Changing Expectations • Saying that inflation is going to take place and doing is two completely different things. • Roosevelt knew he had to make his reflationary talk credible • He did this by expanding the government through deficit spending.

  6. The Model • Small Government Dogma: • Balanced Budget Dogma: • For simplicity, the “gold standard” dogma is excluded from the model, but President Hoover was a strong supporter of the gold standard. This dogma can be added without changing the results because the US government held gold in excess of the monetary base at the time, so this constraint was not binding • Hoover Regime:

  7. The Model • Roosevelt Regime:

  8. The Model • Roosevelt regime is committed to a lower nominal interest rate, higher prices, and a permanent increase in the money supply • Roosevelt’s comments become credible when the public observes a huge increase in government spending • Data suggests that 70-80% of the recovery is because of inflationary expectations • The other 20-30% in explained by the National Industrial Recovery Act (NIRA) and other reflationary policies

  9. Conclusion • Changes in the expectations of future money supply had more of an effect then the Governments extreme spending • Elimination of old Dogma’s explains the change in expectations • With the absence of a regime change the economy would have continued to falter

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