۱- Introduction

۲- Literature

۳- Narrative account

۴- Time series evidence

۵- Role of inflation expectations for the recovery

۶- Implications and future directions

References

Abstract

A regime shift toward increased inflation expectations is credited with jump-starting the recovery from the Great Depression in the United States. What role did inflation expectations play in Germany that experienced a similarly successful economic upturn in the 1930s? We study inflation expectations in the German recovery across several methods: we conduct a narrative study of media sources; we estimate inflation expectations from a factor-augmented vector autoregression model, real interest rate forecasts, and quantitative news series. Consistently across these approaches, we do not find a shift to increased expected inflation. This recovery was different, and its causes lie elsewhere.

Introduction

Inflation expectations play a central role in explanations for the recovery from the Great Depression in the United States . Central bankers frequently refer to the historical precedent for this policy prescription: President Roosevelt made a credible commitment to inflate the economy in the Spring of 1933, which is regarded as a regime change that marks the beginning of the successful recovery of the U.S. economy (e.g. Eggertsson (2008)).1 Figure 1 shows the recovery paths for the United States and Germany. U.S. industrial production increased dramatically following the Roosevelt regime shift in the second quarter of 1933. The recovery in Germany that started in 1932 proceeded at roughly the same rate, starting off slowly in the beginning, but at a higher and steady pace thereafter. We observe similar patterns for prices (Figure 2). Although the U.S. price index of industrial finished goods jumped upward along with industrial production, the German price index increased at a much slower pace.