Affiliation:
1. China Economics and Management Academy, Central University of Finance and Economics, 100081 Beijing, China
Abstract
Abstract
Eggertsson (2012, American Economic Review, 102, 524–55) finds that when the nominal interest rate hits the zero lower bound, the aggregate demand (AD) curve becomes upward-sloping and supply-side policies that reduce the natural rate of output, such as the New Deal implemented in the 1930s, are expansionary. His analysis is restricted to a conventional equilibrium where the AD curve is steeper than the aggregate supply (AS) curve. Recent research, however, demonstrates that an alternative equilibrium arises if the AD curve is flatter than the AS curve. In that case, the same policies become contractionary. In this article, I allow for both possibilities, and let data decide which equilibrium the US economy actually resided in during the Great Depression. Following the work of Blanchard and Quah (1989, American Economic Review, 79, 655–73), I find that there is a high probability that New Deal policies were contractionary. (JEL codes: E32, E52, E62, N12).
Publisher
Oxford University Press (OUP)
Subject
Economics and Econometrics,Geography, Planning and Development
Reference26 articles.
1. Macroeconomic Dynamics Near the ZLB: A Tale of Two Countries;Borağan Aruoba;Review of Economic Studies,2018
2. Monetary Policy and Multiple Equilibria;Benhabib;American Economic Review,2001
3. The Perils of Taylor Rules;Benhabib;Journal of Economic Theory,2001
4. International Evidence on the Sources of Macroeconomic Fluctuations;Bergman;European Economic Review,1996
5. The Dynamic Effects of Aggregate Demand and Supply Disturbances;Blanchard;American Economic Review,1989