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Fiscal Policy in a Depressed Economy: Was There a 'Free Lunch' in 1930s' Britain?

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  • Crafts, Nicholas
  • Mills, Terence

Abstract

We report estimates of the fiscal multiplier for interwar Britain based on quarterly data and time-series econometrics. We find that the government-expenditure multiplier was in the range 0.3 to 0.9 even during the period when interest rates were at the lower bound. The scope for a 'Keynesian solution' to recession was much less than is generally supposed. In the later 1930s but not before Britain's exit from the gold standard, there was a 'fiscal free lunch' in the sense that deficit-financed government spending would have improved public finances enough to pay for the interest onthe extra debt.

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  • Crafts, Nicholas & Mills, Terence, 2013. "Fiscal Policy in a Depressed Economy: Was There a 'Free Lunch' in 1930s' Britain?," CEPR Discussion Papers 9273, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:9273
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    Cited by:

    1. Wataru Miyamoto & Thuy Lan Nguyen & Dmitriy Sergeyev, 2018. "Government Spending Multipliers under the Zero Lower Bound: Evidence from Japan," American Economic Journal: Macroeconomics, American Economic Association, vol. 10(3), pages 247-277, July.
    2. Christian Bredemeier & Falko Juessen & Andreas Schabert, 2015. "Fiscal policy, interest rate spreads,and the zero lower bound," Working Paper Series in Economics 80, University of Cologne, Department of Economics.
    3. Oulton, Nicholas, 2013. "Medium and long run prospects for UK growth in the aftermathof the financial crisis," LSE Research Online Documents on Economics 58239, London School of Economics and Political Science, LSE Library.
    4. Timothy S. Hills & Taisuke Nakata, 2018. "Fiscal Multipliers at the Zero Lower Bound: The Role of Policy Inertia," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 50(1), pages 155-172, February.
    5. Mathias Klein & Roland Winkler, 2021. "The government spending multiplier at the zero lower bound: International evidence from historical data," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 36(6), pages 744-759, September.
    6. Mario Di Serio & Matteo Fragetta & Emanuel Gasteiger, 2020. "The Government Spending Multiplier at the Zero Lower Bound: Evidence from the United States," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 82(6), pages 1262-1294, December.
    7. Valerie A. Ramey & Sarah Zubairy, 2018. "Government Spending Multipliers in Good Times and in Bad: Evidence from US Historical Data," Journal of Political Economy, University of Chicago Press, vol. 126(2), pages 850-901.
    8. Christian Bredemeier & Falko Juessen & Andreas Schabert, 2017. "Fiscal Multipliers and Monetary Policy: Reconciling Theory and Evidence," Working Paper Series in Economics 95, University of Cologne, Department of Economics.
    9. Dengjun Zhang, 2022. "Capacity utilization under credit constraints: A firm‐level study of Latin American manufacturing," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 27(1), pages 1367-1386, January.

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    More about this item

    Keywords

    Defence news; Keynesian solution; Multiplier; Public works; Self-defeating austerity;
    All these keywords.

    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • N14 - Economic History - - Macroeconomics and Monetary Economics; Industrial Structure; Growth; Fluctuations - - - Europe: 1913-

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