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Supply‐Side Policies in the Depression: Evidence from France
Author(s) -
COHENSETTON JÉRÉMIE,
HAUSMAN JOSHUA K.,
WIELAND JOHANNES F.
Publication year - 2017
Publication title -
journal of money, credit and banking
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.763
H-Index - 108
eISSN - 1538-4616
pISSN - 0022-2879
DOI - 10.1111/jmcb.12380
Subject(s) - stagflation , supply side , economics , deflation , great depression , keynesian economics , depression (economics) , macroeconomics , new keynesian economics , demand side , inflation (cosmology) , wage , monetary policy , labour economics , political science , physics , theoretical physics , law
The effects of supply‐side policies in depressed economies are controversial. We shed light on this debate using evidence from France in the 1930s. In 1936, France departed from the gold standard and implemented mandatory wage increases and hours restrictions. Deflation ended but output stagnated. We present time‐series and cross‐sectional evidence that these supply‐side policies, in particular the 40‐hour law, contributed to French stagflation. These results are inconsistent both with the standard one‐sector New Keynesian model and with a medium scale, multisector model calibrated to match our cross‐sectional estimates. We conclude that the New Keynesian model is a poor guide to the effects of supply‐side shocks in depressed economies.