Economic policy and the great depression in a small open economy

Jonathan Payne, Lawrence Uren

Research output: Contribution to journalArticle

1 Scopus citations

Abstract

We use a standard New Keynesian model of a small open economy, extended to include a government sector, to investigate the Great Depression in Australia. A calibrated model with a fixed exchange rate regime, similar to the gold standard, does well in replicating the dynamics of output during the interwar period. We then ask to what extent shocks to the economy would have been moderated by adopting modern-day policies. We find that if policymakers had adopted a flexible exchange rate with a Taylor rule policy that output fluctuations during the Great Depression would have been moderated by up to 25%. Changes in government fiscal policy would also have moderated output fluctuations, but by a slightly smaller amount. Overall, we find that improved policy could have reduced output fluctuations by almost 50%.

Original languageEnglish (US)
Pages (from-to)347-370
Number of pages24
JournalJournal of Money, Credit and Banking
Volume46
Issue number2-3
DOIs
StatePublished - 2014
Externally publishedYes

All Science Journal Classification (ASJC) codes

  • Accounting
  • Finance
  • Economics and Econometrics

Keywords

  • Depression
  • Gold standard
  • Monetary policy
  • Small open economy

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