Core Macroeconomics, Hilary Term 2014

Week 6: Fiscal policy

This week we focus on fiscal policy. The C&S chapter will give you some useful technical tools for understanding the mechanics of deficits and debt, as well as an introduction to rule-based constraints on fiscal policy. The Romer chapter covers some of the same material, but goes much further in discussing political economy approaches to understanding how and why deficits emerge. A number of useful articles have appeared in Oxford Review of Economic Policy (OXREP) in recent years, a selection of which is listed below. I have also added a sprinkling of further recent contributions related to estimates of multipliers, constraints on policymakers, and lessons from the current crisis. Your essay this week is on fiscal policy in the 1930s; some relevant readings are suggested below.


C&S Ch. 6

Romer (Advanced Macroeconomics) Ch. 11

  Winter '05 issue, articles by Allsopp & Vines, Solow, and Krguman
  Winter '09 issue, article by Adam & Vines
  Spring '10 issue, articles by Wren-Lewis, Barrell & Weale
  Winter '11 issue, article by Helm

Other recent work:

Auerbach, Gale, and Harris, "Activist Fiscal Policy", Journal of Economic Perspectives, vol. 24 (2010) no. 4.

Ramey, "Can Government Purchases Stimulate the Economy?", Journal of Economic Literature, vol. 49 (2011) no. 3.

Kirsanova, Leith, and Wren-Lewis, "Optimal Debt Policy, and an Institutional Proposal to help in its Implementation", European Economy Economic Papers no. 275, April 2007. Available as a chapter in this .

For the essay:

Eichengreen, B. "The British Economy Between the Wars," Ch. 12 in The Cambridge Economic History of Modern Britain, vol. 2 (CUP, 2004), pp. 314-343.

Middleton, R., "British Monetary and Fiscal Policy in the 1930s," OXREP, vol. 26(3), 2010, pp. 414-441.

Crafts, N. and T. Mills, "Fiscal Policy in a Depressed Economy: Was there a 'Free Lunch' in 1930s Britain?" CEPR discussion paper no. 9273, Jan. 2013.

You might find interesting the Royal Economic Society lecture slides by Crafts here.

Vernon, J.R., "World War II Fiscal Policies and the End of the Great Depression," Journal of Economic History, vol. 54(4), 1994, pp. 850-868.

Eggertsson, G. "Great Expectations and the End of the Depression," American Economic Review, vol. 98(4), 2008, pp. 1476-1516.


Please write an essay answering the following question.

What can the experience of the 1930s teach us about the potential of fiscal policy for getting an economy out of recession?

The Great Depression is a big topic: too big for one short essay. For an overview, read something like the Eichengreen piece listed above, which is short and clear and should give you a general orientation. Then try to focus in on fiscal policy in one country after the onset of the Depression. (You needn't get into the causes of the Depression unless they are directly relevant.) Policy making and politics might likely be part of a good answer. The readings given above are good starting points for Britain (the first four) or the US (the last two). I would enjoy reading about other cases, though. Germany is a case where rearmament is credited with an early and important role, I think, so that would be an interesting case.

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