Introduction

The three objectives of this chapter are to describe a macroeconometric model of the Australian economy between the wars and to use this model to attempt to answer two questions about the depression of the 1930s in Australia. These questions are:

• how effective were the policies adopted by the Australian authorities to deal with the depression; and

• are there alternative policies which would have given better results?

The second question will be addressed in two steps. First, we will consider, along with the policies actually pursued in the 1930s, a number of alternative sets of policies which were urged by various groups at the time. That is, we will examine the competitors in the ‘battle of the plans’. An attempt will then be made to develop an alternative policy which would have been more effective in offsetting the effects of the depression policies which were actually discussed at the time. In order to do this, it is necessary to consider separately the effect of a number of policy variables—government expenditure, award wages and the exchange rate—on output and employment.

These questions can be examined by means of simulation of the macroeconometric model mentioned above. Simulation of an econometric model allows us to detect most of the effects—both direct and indirect—of a given set of policies and also to obtain numerical estimates of these effects. Econometric models have been used as a tool in studies of the U.S. depression (Norman 1969; Kirkwood 1972; Clark 1949; and Bolch & Pilgrim 1973), and the U.K. depression (Thomas 1975). No published study of the Australian depression has adopted this approach.