DP9273 Fiscal Policy in a Depressed Economy: Was There a 'Free Lunch' in 1930s' Britain?

Author(s):	Nicholas Crafts, Terence C Mills
Publication Date:	January 2013
Keyword(s):	defence news, Keynesian solution, multiplier, public works, self-defeating austerity
JEL(s):	E62, N14
Programme Areas:	Economic History
Link to this Page:	cepr.org/active/publications/discussion_papers/dp.php?dpno=9273

We report estimates of the fiscal multiplier for interwar Britain based on quarterly data and time-series econometrics. We find that the government-expenditure multiplier was in the range 0.3 to 0.9 even during the period when interest rates were at the lower bound. The scope for a 'Keynesian solution' to recession was much less than is generally supposed. In the later 1930s but not before Britain's exit from the gold standard, there was a 'fiscal free lunch' in the sense that deficit-financed government spending would have improved public finances enough to pay for the interest onthe extra debt.