The Great Recession versus the Great Depression: stylized facts on siblings that were given different foster parents

Karl Aiginger

No 2010-9, Economics Discussion Papers from Kiel Institute for the World Economy (IfW Kiel)

Abstract: This paper compares the depth of the Recent Crisis and the Great Depression. We use a new data set to compare the drop in activity in the industrialized countries for seven activity indicators. This is done under the assumption that the Recent Crisis leveled off in mid-2009 for production and will do so for unemployment in 2010. Our data indicate that the Recent Crisis indeed had the potential to be another Great Depression, as shown by the speed and simultaneity of the decline in the first nine months. However, if we assume that a large second dip can be avoided, the drop in all indicators overall will have been smaller than during the Great Depression. This holds true specifically for GDP, employment and priced, and least for manufacturing output. The difference in the depth in the crises concurs with differences in policy reaction. This time monetary policy and fiscal policy were applied courageously, speedily and partly internationally coordinated. During the Great Depression for several years fiscal policy tried to stabilize budgets instead of aggregate demand, and either monetary policy was not applied or was rather ineffective insofar as deflation turned lower nominal interest rates into higher real rates. Only future research will be able to prove the exact impact of economic policy, but the current tentative conclusion is that economic policy prevented the Recent Crisis from developing into a second Great Depression. This is also a partial vindication for economists. The majority of them might not have been able to predict the crisis, but it shows that the science did learn its lesson from the Great Depression and was able to give decent policy advice to at least limit the depth of the Recent Crisis.

Keywords: Financial crisis; business cycle; stabilisation policy; resilience (search for similar items in EconPapers)
JEL-codes: E20 E30 E32 E44 E60 G18 G28 (search for similar items in EconPapers)
Date: 2010
New Economics Papers: this item is included in nep-cba, nep-his, nep-ifn and nep-mac
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Citations: View citations in EconPapers (18)

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https://www.econstor.eu/bitstream/10419/30024/1/618930884.pdf (application/pdf)

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Persistent link: https://EconPapers.repec.org/RePEc:zbw:ifwedp:20109

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