WORKING PAPER

FATAL AUSTERITY: THE ECONOMIC CONSEQUENCES OF HEINRICH BRÜNING | with Alexander Kriwoluzky, Moritz Schularick, Lucas ter Steege

Abstract: Can governments save their way out of recessions? This paper studies the role of austerity for economic recovery based on modern history's most consequential austerity intervention: Chancellor Brüning's budget cuts and tax increases in Germany between 1930 and 1932. We introduce a new dataset on German government finances and macroeconomic variables and employ narrative records to identify the causal effects of austerity. We show that Brüning's belt-tightening aggravated the Great Depression. Without austerity, GDP would have been higher by 4.5 percent and unemployment down by 3.3 million people in 1932, a year with two crucial elections that eventually paved the way for Hitler.
April 2022
May 2020
ACTIVE, OR PASSIVE? REVISITING THE ROLE OF FISCAL POLICY IN THE GREAT INFLATION | with Alexander Kriwoluzky

Abstract: Which role did fiscal policy play during the Great In ation? We estimate a DSGE model with three distinct monetary/fiscal policy regimes using a Sequential Monte Carlo (SMC) algorithm to evaluate the posterior distribution. In contrast to standard sampling algorithms, SMC enables us to determine the monetary/fiscal policy mix by sampling simultaneously from all regions of the parameter space, which makes comparing model fit across regimes unnecessary. A dierentiated perspective results: pre-Volcker macroeconomic dynamics were similarly driven by passive monetary/passive fiscal policy and fiscal dominance. Fiscal policy actions, especially government spending, were critical in the pre-Volcker in ation build-up.

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