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Could Bruening have done it? A Keynesian model of interwar Germany, 1925 -1938

Could Bruening have done it? A Keynesian model of interwar Germany, 1925 -1938. Knut Borchardt and Albrecht Ritschl University of Munich, Munich Germany 1992. Heinrich Bruening. Chancellor of Germany between 1930 and 1932 Appointed by president Responsible for Reich Bank.

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Could Bruening have done it? A Keynesian model of interwar Germany, 1925 -1938

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  1. Could Bruening have done it?A Keynesian model of interwar Germany, 1925 -1938 Knut Borchardt and Albrecht Ritschl University of Munich, Munich Germany 1992

  2. Heinrich Bruening • Chancellor of Germany between 1930 and 1932 • Appointed by president • Responsible for Reich Bank

  3. Bruening’s Economics-Expansionary Policy • The state ought create higher demand • But Germany didn’t have adequate current income • Need to finance through further indebtedness • But NO ONE would lend to them • Only option was Reich Bank – FEAR OF INFLATION

  4. Borchardt • Lack of maneuvering room for anti-cyclical policies in the German Slump • Burden imposed on Germany’s economy by wage conflicts

  5. The model • Keynesian Consumption Function • Investment function dependent on aggregate profits • Functions for tax revenues • Depreciation and import as well as labor demand function • Dummy Variable • A second model with a Kaldorian consumer demand function was estimated

  6. Simulations Simulation Results Sim 1 & 2 SR – trade unionist strategy is superior to sound finance approach LR – vice versa, industry proposal does significantly better Sim 3 & 4 SR – aggravates situation LR – strong wage cuts plus austerity on part of fiscal policy prove beneficial • Sim 1 – Industry proposal • Sim 2 – Trade unionists proposal • Sim 3 – More Aggressive Bruening policy • Sim 4 – Cost Cutting plus absence of balanced budget

  7. Conclusions • The efficacy of fiscal policy with regard to employment depends heavily on the behavior of wages “Evidence suggests that a major slump could not have been prevented by just avoiding balanced budget policies. In order to arrive at substantial reductions in unemployment, wage cuts appear to be necessary prerequisite in any case. Indeed it turns out that a pure wage cut strategy in the spirit of what Bruening set forth in the course of 1931 provided extended maneuvering room from 1931 on to the benefit of the Nazi economy. Thus Bruening’s well known claim that he was ousted 100 meters before reaching his goal is possibly not too mistaken after all.

  8. Alternative • Hans Joachim Voth: “Did high wages bring down the Weimar republic?” • High cost of labor was due to market demand • Non farm growth in Germany was 10% - twice as high as U.S. and U.K. during period 1925 - 1928

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