In this paper, we apply an empirical analysis to provide an answer to the Bullionist Controversy in Great Britain in the 18th century adopted to the Netherlands in the Great Depression. Therefore, we answer the question whether the price evolution in this period has been mostly driven by demand or supply shocks and whether remaining in the gold standard was a good decision for the economic development or not.
For our analysis we estimated a vector autoregressive model (VAR) and applied the Blanchard-Quah decomposition to identify the demand and supply shocks on the output growth and inflation. Therefore, we use an impulse response and a Forecast Error Variance Decomposition to illustrate our results.
We argue in this paper that the impact of the Great Depression on the economy of the Netherlands has been bigger because it stayed part of the Gold Bloc and therefore maintain convertibility. Thus, we bring forward the argument of the bullionist that the price shock has been a result of a demand shock. he gold standard as a consequence has led to an overvaluation of the Dutch currency (guilder). For a small open economy like the Netherlands which is highly dependent of exports and has a big shipping sector the exchange rate plays a crucial role. Thus, the overvaluation resulted in a negative demand shock.
Furthermore the persistent deflation and downward pressure on wages have led to even higher deflation expectations of the population, what dampened the aggregate supply. Finally, the policy decisions of the government were incapable to reduce the problem and get out of the depression. Only after the suspension of the convertibility to the gold standard and a devaluation of the currency the economy was able to recover. For this reason an earlier suspension would have had reduced the length and the intensity of the Great Depression for the economy of the Netherlands.
Table of Contents
1. Introduction
2. Historical Background
3. Method
4. Empirical Analysis
5. Conclusion
Objectives and Topics
This paper aims to provide an empirical analysis of the "Bullionist Controversy" within the context of the Netherlands during the Great Depression (1925-1936), specifically investigating whether economic decline was driven by demand or supply shocks and evaluating the role of the gold standard.
- Quantitative analysis using Vector Autoregressive (VAR) models
- Application of Blanchard-Quah decomposition to identify economic shocks
- Assessment of the impact of the Gold Standard on the Dutch economy
- Evaluation of government policy and its role in the persistence of the depression
Excerpt from the Book
1 Introduction
In consequence of the Stock Market Crash in the Unites States of 1929 many countries have been hit by the so called Great Depression. In concrete the Netherlands economy declined gradually in the period in 1929-1931 and reached nadir in the period 1933-1936. The depression in the Netherlands was at its low point much later and therefore was affected by the depression significantly longer than other countries.
In this paper, we apply an empirical analysis to provide an answer to the Bullionist Controversy in Great Britain in the 18th century adopted to the Netherlands in the Great Depression. Therefore, we answer the question whether the price evolution in this period has been mostly driven by demand or supply shocks and whether remaining in the gold standard was a good decision for the economic development or not.
For our analysis we estimated a vector autoregressive model (VAR) and applied the Blanchard-Quah decomposition to identify the demand and supply shocks on the output growth and inflation. Therefore, we use an impulse response and a Forecast Error Variance Decomposition to illustrate our results.
We argue in this paper that the impact of the Great Depression on the economy of the Netherlands has been bigger because it stayed part of the Gold Bloc and therefore maintain convertibility. Thus, we bring forward the argument of the bullionist that the price shock has been a result of a demand shock. The gold standard as a consequence has led to an overvaluation of the Dutch currency (guilder). For a small open economy like the Netherlands which is highly dependent of exports and has a big shipping sector the exchange rate plays a crucial role. Thus, the overvaluation resulted in a negative demand shock. Furthermore the persistent deflation and downward pressure on wages have led to even higher deflation expectations of the population, what dampened the aggregate supply.
Summary of Chapters
1. Introduction: The introduction outlines the motivation for studying the Dutch economy during the Great Depression and establishes the research goal of identifying the nature of economic shocks using VAR models.
2. Historical Background: This chapter reviews the economic situation of the Netherlands in the 1920s and 1930s, highlighting the impact of the Gold Standard and the conservative government policies under Colijn.
3. Method: The method section describes the technical implementation of the Vector Autoregressive model and the Blanchard-Quah decomposition used to distinguish between permanent supply and temporary demand shocks.
4. Empirical Analysis: This chapter presents the data set and the results of the impulse response functions and variance decomposition, showing how demand and supply shocks influenced production and inflation.
5. Conclusion: The conclusion synthesizes the findings, arguing that the adherence to the Gold Standard exacerbated the depression and that an earlier suspension would have likely improved economic outcomes.
Keywords
Great Depression, Netherlands, Gold Standard, Bullionist Controversy, VAR model, Blanchard-Quah decomposition, demand shocks, supply shocks, economic history, deflation, inflation, exchange rate, guilder, industrial production, macroeconometrics
Frequently Asked Questions
What is the core focus of this research paper?
The paper focuses on analyzing the economic performance of the Netherlands during the Great Depression, specifically using quantitative methods to determine the causes of its prolonged decline.
What are the primary thematic fields covered?
The central themes include the Bullionist Controversy, the Gold Standard, macro-economic shocks (demand vs. supply), and the impact of government economic policy during the 1920s and 1930s.
What is the primary research question?
The research asks whether the price and output evolution in the Netherlands during this period was primarily driven by demand or supply shocks and if maintaining the Gold Standard was economically detrimental.
Which scientific methodology is utilized?
The authors use an empirical quantitative approach, specifically employing a Vector Autoregressive (VAR) model and the Blanchard-Quah decomposition to isolate shocks.
What topics are discussed in the main body?
The body covers historical background, the mathematical setup of the VAR model, data presentation, the estimation of impulse responses, and variance decomposition results.
Which keywords characterize the work?
Key terms include Great Depression, Gold Standard, VAR model, demand/supply shocks, deflation, and Dutch economic history.
How did the Gold Standard affect the Dutch economy according to the authors?
The authors argue that the Gold Standard led to an overvaluation of the guilder, which acted as a negative demand shock and worsened the depression due to lost competitiveness.
What role does the "New Deal" policy play in the discussion?
The New Deal is mentioned as a counterfactual example of expansionary policy that could have helped the Netherlands by shifting expectations from deflationary to inflationary.
Why did the authors choose the time period 1925-1934 for their analysis?
They focused on this period to capture the time during which the Netherlands strictly maintained the Gold Standard, allowing them to isolate these influences from the later suspension period.
- Quote paper
- Anonym (Author), 2016, The Netherlands in the Great Depression 1925-1934. A VAR Model Analysis of the Demand and Supply Shocks on the Price Level, Munich, GRIN Verlag, https://www.hausarbeiten.de/document/353297
