Must-Read: Jérémie Cohen-Setton, Joshua K. Hausman, and Johannes F. Wieland: Supply-Side Policies in the Depression: Evidence from France

Must-Read: Jérémie Cohen-Setton, Joshua K. Hausman, and Johannes F. Wieland: Supply-Side Policies in the Depression: Evidence from France: “The effects of supply-side policies in depressed economies… evidence from France in the 1930s…

…In 1936, France departed from the gold standard and implemented large-scale mandatory wage increases and hours restrictions. This quickly ended deflation, but output stagnated. We present time-series and cross-sectional evidence that the 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 two-sector model calibrated to match our cross-sectional estimates. We propose an alternative, disequilibrium model consistent with expansionary effects of lower real interest rates and contractionary effects of higher real wages. This model and our empirical evidence suggest that without supply-side problems, France would have recovered rapidly after leaving the gold standard.