Publication

This paper estimates a series of shocks to hit the US economy during the Great Depression, using a New Keynesian model. The author argues that shocks to long-run inflation expectations appear to account for much of the cyclical behavior of employment, while an increase in labor's bargaining power played an important role in lengthening the Depression. Government spending played very little role during the Hoover administration and the New Deal, until the rise in military spending effectively brought an end to the Depression in 1941. The experience of the 1930s offers lessons to modern policymakers, the author concludes.