103/2012 Nicholas Crafts and Terence C Mills
We report estimates of the fiscal multiplier for interwar Britain based on quarterly data, time-series econometrics, and ‘defence news’. We find that the government expenditure multiplier was in the range 0.5 to 0.8, much lower than previous estimates. The scope for a Keynesian solution to recession was much lower than is generally supposed. We do find that rearmament gave a substantial boost to real GDP after 1935 but this was because the private sector responded to news of massive future defence spending and does not imply that the multiplier effect of temporary public works programs would have been large.
The Journal of Economic History