Identifying Fiscal Policy (In)effectiveness from the Differential Counter-Cyclicality of Government Spending in the Interwar Period

Differences across decades in the counter-cyclical stance of fiscal policy can identify whether the growth in government spending affects output growth and so speeds recovery from a recession. We study government-spending reaction functions from the 1920s and 1930s for twenty countries. There are two main findings. First, surprisingly, government spending was less counter-cyclical in the 1930s than in the 1920s. Second, the growth of government spending did not have a significant effect on output growth, so that there is little evidence that this feature of fiscal policy played a stabilizing role in the interwar period.