Labor Market Policies and the "Missing Deflation" Puzzle: Lessons from Hoover Policies during the U.S Great Depression

Jordan Roulleau-Pasdeloup and Anastasia Zhutova

Cahiers de Recherches Economiques du Département d'économie from Université de Lausanne, Faculté des HEC, Département d’économie

Abstract: We document the existence of a "missing deflation" puzzle during the U.S. Great Depression (1929-1941) and show that the solution of this puzzle lies in Hoover policies. Herbert Hoover made multiple public announcements asking firms not to cut wages, most of which complied. The consequences of such a policy are ambiguous since it affects aggregate fluctuations via two channels: as a negative aggregate supply shock this policy decreases output while increasing inflation, but more inflation can postpone the occurrence of a liquidity trap when the economy is hit by a large negative aggregate demand shock. We develop and estimate a medium scale New Keynesian model to measure the effect of Hoover policies during the Great Depression and we find evidence that without such polices the U.S. economy would have ended up in a liquidity trap two years before it actually did, suffering an even deeper recession with a larger deflation. In addition, the welfare effects of Hoover policy are found to be clearly positive.

Keywords: Zero lower bound; Deflation; Great Depression (search for similar items in EconPapers)
JEL-codes: C11 E24 E31 E32 E44 E52 N12 (search for similar items in EconPapers)
Pages: 57 pp.
Date: 2015-05
New Economics Papers: this item is included in nep-cba, nep-dge, nep-mac and nep-mon
References: Add references at CitEc
Citations: View citations in EconPapers (5)

Downloads: (external link)
http://www.hec.unil.ch/deep/textes/15.05.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:lau:crdeep:15.05

Access Statistics for this paper

More papers in Cahiers de Recherches Economiques du Département d'économie from Université de Lausanne, Faculté des HEC, Département d’économie Université de Lausanne, Faculté des HEC, Département d’économie, Internef, CH-1015 Lausanne. Contact information at EDIRC.
Bibliographic data for series maintained by Christina Seld ().