Discussion paper

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

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.

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Citation

Crafts, N and T Mills (2013), ‘DP9273 Fiscal Policy in a Depressed Economy: Was There a 'Free Lunch' in 1930s' Britain?‘, CEPR Discussion Paper No. 9273. CEPR Press, Paris & London. https://cepr.org/publications/dp9273