The Keynesian-Monetarist Debate on Business Cycles: A Case Study of The Great Depression

Mainly there exist two competing models to explain the Great Depression in the relevant literature: Monetarist and Keynesian models. Monetarists assert that The Depression resulted from a contraction of the money supply in the early 1930’s. Keynesians, on the other hand, argue that The Depression was caused by a fail in autonomous spending, particularly investment and, and, within investment, housing, spurred a general collapse. The purpose of this paper is to explore the reasons of The Great Depression in the perspective of Keynesian and Monetarists approaches. The severe extends of Great Depression are clear but the reasons of the depression are ambiguous. One reason, often and correctly given, is the absence of expansionary macroeconomic policy between 1929 and 1933. The monetary and fiscal policies were not used. Those policies could have been effective in moderating or eliminating the contraction (Temin, 1979, p.6). Keynesians following The General Theory regard investment behavior as behavior containing a substantial autonomous component, claim that investment responds to the state of business confidence incorporates the effect of episodes of speculation overbuilding. The instability and unpredictability of fixed investment behavior, of course, forms the basis of Keynesian support for an activist and interventionist role for government fiscal policy (Gordon, 1986, p. 268). In contrast, Monetarists do not single out investment for special attention. Changes in aggregate private spending, consumption and investment alike are attributed to prior fluctuations in the supply of money. Monetarists would expect (if forced uncharacteristically to devote special attention to fixed investment behavior) to find a strong role for the money supply as a primary determinant of investment behavior (Gordon, p. 268)