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Abstract

This paper suggests that the US recovery from the Great Depression was driven by a shift in expectations. This shift was caused by President Franklin Delano Roosevelt’s policy actions. On the monetary policy side, Roosevelt abolished the gold standard and – even more importantly – announced the explicit objective of inflating the price level to pre-Depression levels. On the fiscal policy side, Roosevelt expanded real and deficit spending, which made his policy objective credible. These actions violated prevailing policy dogmas and initiated a policy regime change as in Sargent (1983) and Temin and Wigmore (1990). The economic consequences of Roosevelt are evaluated in a dynamic stochastic general equilibrium model with nominal frictions.

Citation

Eggertsson, Gauti B. 2008. “Great Expectations and the End of the Depression.” American Economic Review, 98 (4): 1476–1516.

@article{eggertsson2008great,
  title={Great Expectations and the End of the Depression},
  author={Eggertsson, Gauti B},
  journal={American Economic Review},
  volume={98},
  number={4},
  pages={1476--1516},
  year={2008},
  publisher={American Economic Association}
}