Great Expectations and the End of the Depression

American Economic Review · 2008 · Volume 98 · Issue 4

Abstract

This paper suggests that the US recovery from the Great Depression was driven by a shift in expectations. This shift was caused by President Franklin Delano Roosevelt's policy actions. On the monetary policy side, Roosevelt abolished the gold standard and -- even more importantly -- announced the explicit objective of inflating the price level to pre-Depression levels. On the fiscal policy side, Roosevelt expanded real and deficit spending, which made his policy objective credible. These actions violated prevailing policy dogmas and initiated a policy regime change as in Sargent (1983) and Temin and Wigmore (1990). The economic consequences of Roosevelt are evaluated in a dynamic stochastic general equilibrium model with nominal frictions. (JEL D84, E52, E62, N12, N42)

Keywords

Expectations, Speculations, Monetary Policy, Fiscal Policy, Economic History: Macroeconomics, Growth and Fluctuations: U.S., Canada: 1913-, Economic History: Government, War, Law, and Regulation: U.S.

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