Creating Expectations (DFG)

How can economies recover from financial crises and the deep recessions that typically follow? What role do changes in expectations play to kick-start the economy when interest rates have already fallen to extremely low levels? While it is clear that these questions have immediate policy relevance today, it is not the first time they have been asked. At the height of the Great Depression, the economic challenges looked surprisingly similar and in this project we propose to study changes in expectations as drivers of the economic recovery from the Great Depression in Germany.

In modern macroeconomics, expectations play the lead role in the economic drama. The behaviour of a forward-looking agent today is determined by what she thinks tomorrow will be like. This revolution in macroeconomic thinking has important implications for economic history: if we are to understand key events in macroeconomic history such as the Great Depression, economic history must take expectations seriously and study the expectation formation process of contemporary economic agents (Sargent 1982; Temin 1989). Expectations become particularly virulent in crisis situations when economic conditions are volatile and political uncertainty typically increases substantially. This makes the Great Depression an ideal field to study historical expectation formation.

Collaborators: Alexander Kriwoluzky, Stephanie Ettmeier, Andrea Papadia