American Economic Review: Vol. 98 No. 4 (September 2008)


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Great Expectations and the End of the Depression

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Eggertsson, Gauti B. 2008. "Great Expectations and the End of the Depression." American Economic Review, 98(4): 1476-1516.

DOI: 10.1257/aer.98.4.1476


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)

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Eggertsson, Gauti B. (Federal Reserve Bank of New York)

JEL Classifications

D84: Expectations; Speculations
E52: Monetary Policy
E62: Fiscal Policy
N12: Economic History: Macroeconomics; Growth and Fluctuations: U.S.; Canada: 1913-
N42: Economic History: Government, War, Law, and Regulation: U.S.; Canada: 1913-

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