What was the scope for British Keynesian policies in the 1930s?

There is a new paper by Nicholas Crafts & Terence Mills in the December 2013 Journal of Economic History, entitled Rearmament to the Rescue? New Estimates of the Impact of “Keynesian” Policies in 1930s’ Britain.  The abstract is here:

We report estimates of the fiscal multiplier for interwar Britain based on quarterly data, time-series econometrics, and “defense news.” We find that the government expenditure multiplier was in the range 0.3 to 0.8, much lower than previous estimates. The scope for a Keynesian solution to recession was less than is generally supposed. We find that rearmament gave a smaller boost to real GDP than previously claimed. Rearmament may, however, have had a larger impact than a temporary public works program of similar magnitude if private investment anticipated the need to add capacity to cope with future defense spending.

You will note that previous estimates of the multiplier for this period are much higher, but this conclusion is based on a new quarterly gdp series for the UK and also on identified “defense shocks,” drawn from The Economist magazine.  At this time, by the way, Great Britain was very close to the zero lower bound and had significant unemployed resources.  I am not sure I would push this as “the correct answer,” but rather as a more general lesson about the fragility of our knowledge in this area.

The published (gated) version of the paper is here.  There are ungated versions here.


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