Great expectations: How FDR ended the Depression

Can this be the final nail in the monetarist coffin? Gauti Eggertsson, an economist at the New York Fed, argues in new Staff Report 234, Great Expectations and the End of the Depression, that the US economic recovery under FDR was not about monetary factors, but public expectations:

This paper argues that the U.S. economy's recovery from the Great Depression was driven by a shift in expectations brought about by the policy actions of President Franklin Delano Roosevelt. On the monetary policy side, Roosevelt abolished the gold standard and—even more important—announced the policy objective of inflating the price level to pre-depression levels. On the fiscal policy side, Roosevelt expanded real and deficit spending. Together, these actions made his policy objective credible; they violated prevailing policy dogmas and introduced a policy regime change such as that described in work by Sargent and by Temin and Wigmore. The economic consequences of Roosevelt's policies are evaluated in a dynamic stochastic general equilibrium model with sticky prices and rational expectations.

In his conclusions he draws some policy lessons for Japanese policymakers:

If a credible inflation program is implemented in Japan, with coordinated monetary and fiscal policy, it is quite likely that the effect will be swift and visible, much in the same way as the recovery in 1933-37 in the US under Franklin Delano Roosevelt.

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