Stabilisation Policy and Recovery from Deep Recessions

  • Tadeusz Gwiazdowski

Student thesis: Unknown


In recent times policymakers have had to use fiscal policy and unconventional monetary policy to stabilise the business cycle. This is largely because nominal interest rates around the world hit their effective lower bound shortly after 2008. This thesis analyses the role discretionary fiscal policy and unconventional monetary policy can play in the stabilisation of the business cycle with a particular focus on periods of deep recession. It does so through the lens of history using two noteworthy case studies. The goal of the thesis is to further our understanding of the scope and effectiveness of fiscal policy and unconventional monetary policy and the channels through which they are transmitted to the real economy. In Chapter One, an empirical analysis of a unique and unexplored historical dataset for Greece is conducted to provide new insight into the state- and regime-dependence of the government spending multiplier. Greece fought numerous wars between the establishment of the modern Greek state and the outbreak of World War II. Using data for both armament and disarmament, and controlling for states and regimes in the economy, our empirical findings suggest that the exchange rate regime, the presence of exchange controls, and the business cycle all have a significant impact on the size of the government spending multiplier. However, analysing the interaction of these states and regimes turns out to be crucial to removing the bias from our multiplier estimates. In particular, regardless of other states and regimes in the economy, the multiplier is estimated to be zero when there is a positive output gap. In contrast, it is well above unity when spending decreases and there is a negative output gap. Chapter Two presents new evidence that British recovery from the recession of the early 1930s was driven by a policy regime change that generated a recovery in inflation expectations in April 1933. The previous literature studying this recession has struggled to explain when, how and why the British economy recovered after nominal interest rates reached their effective lower bound in mid-1932. To address this issue, this chapter analyses a broad spectrum of monthly frequency macroeconomic data, conducts a new narrative analysis of British newspapers during the recovery and performs counterfactual analysis using a calibrated dynamic stochastic general equilibrium (DSGE) model for 1930s Britain. The combination of these different methods provides robust evidence that the British economy continued to display weakness in late 1932 and early 1933. It finds that only in April 1933, when the US left the gold standard and completed its own policy regime change, was there a positive and permanent shock to the exchange value of the pound. This allowed the newly established Exchange Equalisation Account (EEA) to intervene in foreign exchange markets, build up gold and foreign exchange reserves and convince agents in the economy that the money supply and the price level would rise. This led to a return of expectations of inflation, the reduction of real interest rates and this stimulated a robust recovery in the British economy.
Date of Award1 Aug 2019
Original languageEnglish
Awarding Institution
  • The University of Manchester
SupervisorMichele Berardi (Supervisor) & Raffaele Rossi (Supervisor)

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