Supply‐Side Policies in the Depression: Evidence from France

Abstract

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.

Are Supply Shocks Contractionary at the ZLB? Evidence from Utilization-Adjusted TFP Data

“…On the other hand, Wieland (2015) uses the Great Japan Earthquake and global oil supply disruptions as exogenous supply shocks and finds that negative shocks are contractionary at the zero lower bound. In a similar vein, Cohen-Setton, Hausman, and Wieland (2016) show that cartelization efforts exacerbated France's Great Depression. These papers focus on shocks to aggregate supply which are different than neutral productivity shocks.…”

Understanding Persistent ZLB: Theory and Assessment

“…While we discipline equilibrium selection using the empirical model fit, a caveat of expectation traps is that we do not explicitly model how this expectations formation occurs, and how agents coordinate on one of the many multiple equilibria.21 Relatedly, Cohen-Setton,Hausman and Wieland (2017) provide partial equilibrium evidence from a supply-side policy restricting hours worked in France. They find that a policy-mandated reduction in weekly hours worked adversely affected industrial production in sectors exposed to the law.…”