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The depreciation is endogeneously balanced in medium run.
P=aPm+bPh
a=20%, so if Pm rises due to devaluation, we have a direct effect.
W=f(PM) - wage bargaining becausse imports get expensiver. W is 60%.
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Devaluers UK USA Sweden Norway Denmark |
Gold block France Belgium Italy Switz Poland |
Output, inflation, stock market etc. show more of a recovery in devaluers
By 1937 this effect is elliminated. This happens because
1. Export performance - Broadberry - 3% kick.
2. cheap money - interest rates can be lowered. Bank rate to 2%. Again some countries wait and see with the lowering of interest as they fear for hyperinflation. The transmition between low interest and growth is mixed. Investment does not really start on bank lending, more internal financing. Lower interest discourages holding of financial assets. Stock markets shoot up. The is a direct link to housing market and consumer durables. But they only 5% of GDP.
3. Wealth effects. Real wealth goes up. Because partially of share and house price movements.
4. Price surprise in the Labour market. Gold blacks had higher real wage growth. In UK the result depends on the price index uses. Whole sale prices do support. GDP deflator suggests some, but the timing is not right. Also no consistent international evidence (fashism pushes wages down etc)
1. Financial stability - more will go bust during a strong recession
2. Import propensity - imports go down permanently. Inconsistent with the classical devaluation effect. Lower imports allow higher income. Domestic producers will not cut down production once devaluation finishes.
3. Permanent low interest rate. Inflation rate did not grow (only to 1%). So monetary policy can be permanent. This is because all countries devalue.
When you observe unemployment, economic growth does not absorb all the growth in labour force.
Demobilisation in 1920 did not lead to high equilibrium UE.
World deprecion had persistent effect. It is persistent because:
1. Long run changes (nothing to do with hysteresis)
Benefit system (1911 beginning). It does not explain
Hours of work. Unit labour costs do come down, so it does not come down
2. Following a shock, we may have hysteresis effect
Human capital gets destroyed
Investment level falls (does not fall in 21)
Insider-outsider
We cannot find any strong evidence for labour mkts.
Large export shock, overshooting of exchange rate.
But they all together had effects.
In 30-s model is much better:
1. Hysteresis via simple labour market
Insider - outsider
Long-term