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

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

106/2012 Nicholas Crafts and Terence C Mills
economic history, working papers
European Review of Economic History
http://doi.org/10.1093/ereh/heu024

106/2012 Nicholas Crafts and Terence C Mills

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 that 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 that deficit-financed government spending would have improved public finances enough to pay for the interest on the extra debt.

Economic History

European Review of Economic History

http://doi.org/10.1093/ereh/heu024