The coronavirus economic crisis: lessons from the great depression

The Coronavirus, known as COVID-19, grievously impacted the US economy. In response to economic turmoil the US administration implemented rigorous stimulus packages to revitalize the economy and prevent another Great Depression. The objective of this study is to look at the efficacy of macroeconomic policies implemented during the Great Depression and to compare it with those policies undertaken by the US government during the current COVID-19 crisis. Further, the study investigates the number of length lags it takes for the implementation of the macroeconomic policies to be reflected in economic recovery. This will entail the use of U.S. real GDP, narrow definition of money and budget deficit obtained for the years 1926-1945. The study estimated the US monetary and fiscal multipliers during the Great Depression and found that the implemented monetary policy proved effective in economic recovery whereas the fiscal policy was not. However, this result might not hold true during the current disruption. This is because the stimulus packages undertaken are the highest in the US history and the fear of crowding out of the government spending is not applicable as the interest rates are kept at a zero bound. Further, the current government spending share stands at 38% of US GDP, unlike the 5% recorded during the 1930s. Moreover, the study found that the optimum lag length for recovery during the Great Depression was two years. However, if the US contains the current crisis with proper measures and tools, then the pace of economic recovery should be faster.