Great Depression Warning: You are not logged in. Your IP address will be publicly visible if you make any edits. If you log in or create an account, your edits will be attributed to your username, along with other benefits.Anti-spam check. Do not fill this in! =====Expectations hypothesis===== Since economic mainstream turned to the [[new neoclassical synthesis]], expectations are a central element of macroeconomic models. According to [[Peter Temin]], Barry Wigmore, Gauti B. Eggertsson and [[Christina Romer]], the key to recovery and to ending the Great Depression was brought about by a successful management of public expectations. The thesis is based on the observation that after years of deflation and a very severe recession important economic indicators turned positive in March 1933 when [[Franklin D. Roosevelt]] took office. Consumer prices turned from deflation to a mild inflation, industrial production bottomed out in March 1933, and investment doubled in 1933 with a turnaround in March 1933. There were no monetary forces to explain that turnaround. Money supply was still falling and short-term interest rates remained close to zero. Before March 1933, people expected further deflation and a recession so that even interest rates at zero did not stimulate investment. But when Roosevelt announced major regime changes, people began to expect inflation and an economic expansion. With these positive expectations, interest rates at zero began to stimulate investment just as they were expected to do. Roosevelt's fiscal and monetary policy regime change helped make his policy objectives credible. The expectation of higher future income and higher future inflation stimulated demand and investment. The analysis suggests that the elimination of the policy dogmas of the gold standard, a balanced budget in times of crisis and small government led endogenously to a large shift in expectation that accounts for about 70β80% of the recovery of output and prices from 1933 to 1937. If the regime change had not happened and the Hoover policy had continued, the economy would have continued its free fall in 1933, and output would have been 30% lower in 1937 than in 1933.<ref>Gauti B. Eggertsson, [https://www.aeaweb.org/articles.php?doi=10.1257/aer.98.4.1476 ''Great Expectations and the End of the Depression''] {{Webarchive|url=https://web.archive.org/web/20160125070317/https://www.aeaweb.org/articles.php?doi=10.1257%2Faer.98.4.1476 |date=January 25, 2016 }}, American Economic Review 2008, 98:4, 1476β1516</ref><ref>Christina Romer, [https://www.nytimes.com/2012/10/21/business/how-the-fiscal-stimulus-helped-and-could-have-done-more.html "The Fiscal Stimulus, Flawed but Valuable"] {{Webarchive|url=https://web.archive.org/web/20211129132620/https://www.nytimes.com/2012/10/21/business/how-the-fiscal-stimulus-helped-and-could-have-done-more.html |date=November 29, 2021 }}, ''The New York Times'', October 20, 2012.</ref><ref>Peter Temin, ''Lessons from the Great Depression'', MIT Press, 1992, {{ISBN|978-0-262-26119-7}}, pp. 87β101.</ref> The [[recession of 1937β1938]], which slowed down economic recovery from the Great Depression, is explained by fears of the population that the moderate tightening of the monetary and fiscal policy in 1937 were first steps to a restoration of the pre-1933 policy regime.<ref>{{cite journal|jstor=29730131|at=p. 1480|title=Great Expectations and the End of the Depression|journal=The American Economic Review|volume=98|issue=4|last1=Eggertsson|first1=Gauti B.|year=2008|doi=10.1257/aer.98.4.1476|hdl=10419/60661|hdl-access=free}}</ref> Summary: Please note that all contributions to Christianpedia may be edited, altered, or removed by other contributors. If you do not want your writing to be edited mercilessly, then do not submit it here. You are also promising us that you wrote this yourself, or copied it from a public domain or similar free resource (see Christianpedia:Copyrights for details). Do not submit copyrighted work without permission! Cancel Editing help (opens in new window) Discuss this page