Fiscal policy under constraints: fiscal capacity and austerity during the Great Depression

Andrea Papadia

doi:10.1111/ehr.13253

Fiscal policy under constraints: fiscal capacity and austerity during the Great Depression

Andrea Papadia^*

^*Corresponding author for this work

Economics

Research output: Contribution to journal › Article › peer-review

Abstract

The Great Depression was characterized by widespread fiscal policy mistakes in the form of a contractionary or insufficiently expansionary fiscal stance. Despite this general conclusion, there were large differences in the conduct of fiscal policy between countries. I find that a higher degree of fiscal capacity helped countries run less procyclical fiscal policies by allowing them to borrow more extensively. Lower borrowing costs only partially explain this finding. Taken together, the results indicate that interwar governments were constrained in their policies by past investments in fiscal capacity, and not just by Gold Standard membership, ideology, and inadequate knowledge, as commonly held in the literature.

Original language	English
Pages (from-to)	90-118
Number of pages	29
Journal	The Economic History Review
Volume	77
Issue number	1
Early online date	19 Apr 2023
DOIs	https://doi.org/10.1111/ehr.13253
Publication status	Published - 1 Feb 2024

Bibliographical note

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10.1111/ehr.13253Licence: CC BY

Fiscal policy under constraints Fiscal capacity and austerity during the - 2023 - Papadia
© 2023 The Authors
Final published version, 2.2 MBLicence: CC BY

Cite this

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abstract = "The Great Depression was characterized by widespread fiscal policy mistakes in the form of a contractionary or insufficiently expansionary fiscal stance. Despite this general conclusion, there were large differences in the conduct of fiscal policy between countries. I find that a higher degree of fiscal capacity helped countries run less procyclical fiscal policies by allowing them to borrow more extensively. Lower borrowing costs only partially explain this finding. Taken together, the results indicate that interwar governments were constrained in their policies by past investments in fiscal capacity, and not just by Gold Standard membership, ideology, and inadequate knowledge, as commonly held in the literature.",

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