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What lessons from the 1930s? CEPS Working Document No. 312, 7 May 2009

Gros, Daniel and Alcidi, Cinzia. (2009) What lessons from the 1930s? CEPS Working Document No. 312, 7 May 2009. [Working Paper]

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    Abstract

    This paper explores three areas in which the experience of the Great Depression might be relevant today: monetary policy, fiscal policy and the systemic stability of the banking system. We confirm the consensus on monetary policy: deflation must be avoided. With regard to fiscal policy, the picture is less clear. We cannot confirm a widespread opinion according to which fiscal policy did not work because it was not tried. We find that fiscal policy went to the limit of what was possible within the confines of sustainability, as they existed then. Our investigation of the US banking system shows a surprising resilience of the sector: commercial banking operations (deposit-taking and lending) remained profitable even during the worst years. This suggests one policy conclusion: At present the authorities in both the US and Europe have little choice but to make up for the losses on ‘legacy’ assets and wait for banks to earn back their capital. But to prevent future crises of this type, one should make sure that losses from the investment banking arms cannot impair commercial banking operations. At least a partial separation of commercial and investment banking thus seems justified by the greater stability of commercial banking operations.

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    Item Type: Working Paper
    Subjects for non-EU documents: EU policies and themes > External relations > EU-US
    EU policies and themes > Policies & related activities > economic and financial affairs > monetary policy
    EU policies and themes > Policies & related activities > economic and financial affairs > fiscal policy
    EU policies and themes > Policies & related activities > economic and financial affairs > financial crisis 2008-on/reforms/economic governance
    Subjects for EU documents: UNSPECIFIED
    EU Series and Periodicals: UNSPECIFIED
    EU Annual Reports: UNSPECIFIED
    Series: Series > Centre for European Policy Studies (Brussels) > CEPS Working Documents
    Depositing User: Phil Wilkin
    Official EU Document: No
    Language: English
    Date Deposited: 20 May 2009
    Page Range: p. 19
    Last Modified: 15 Feb 2011 18:11
    URI: http://aei.pitt.edu/id/eprint/10966

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