<P> According to Peter Temin, Barry Wigmore, Gauti B. Eggertsson and Christina Romer the biggest primary impact of the New Deal on the economy and the key to recovery and to end the Great Depression was brought about by a successful management of public expectations . Before the first New Deal measures people expected a contractionary economic situation (recession, deflation) to persist . Roosevelt's fiscal and monetary policy regime change helped to make his policy objectives credible . Expectations changed towards an expansionary development (economic growth, inflation). The expectation of higher future income and higher future inflation stimulated demand and investments . The analysis suggests that the elimination of the policy dogmas of the gold standard, balanced budget and small government led to a large shift in expectation that accounts for about 70--80 percent of the recovery of output and prices from 1933 to 1937 . If the regime change would not have happened and the Hoover policy would have continued, the economy would have continued its free fall in 1933, and output would have been 30 percent lower in 1937 than in 1933 . </P> <P> In the new classical macroeconomics view of the Great Depression large negative shocks caused the 1929--33 downturn--including monetary shocks, productivity shocks, and banking shocks--but those developments become positive after 1933 due to monetary and banking reform policies . According to the model Cole - Ohanian impose, the main culprits for the prolonged depression were labor frictions and productivity / efficiency frictions (perhaps, to a lesser extent). Financial frictions are unlikely to have caused the prolonged slump . </P> <P> In the Cole - Ohanian model there is a slower than normal recovery which they explain by New Deal policies which they evaluated as tending towards monopoly and distribution of wealth . The key economic paper looking at these diagnostic sources in relation to the Great Depression is Cole and Ohanian's work . Cole - Ohanian point at two policies of New Deal: the National Industrial Recovery Act and National Labor Relations Act (NLRA), the latter strengthening NIRA's labor provision . According to Cole - Ohanian New Deal policies created cartelization, high wages, and high prices in at least manufacturing and some energy and mining industries . Roosevelts policies against the severity of the Depression like the NIRA, a "code of fair competition" for each industry were aimed to reduce cutthroat competition in a period of severe deflation, which was seen as the cause for lowered demand and employment . The NIRA suspended antitrust laws and permitted collusion in some sectors provided that industry raised wages above clearing level and accepted collective bargaining with labor unions . The effects of cartelization can be seen as the basic effect of monopoly . The given corporation produces too little, charges too high of a price, and under - employs labor . Likewise, an increase in the power of unions creates a situation similar to monopoly . Wages are too high for the union members, so the corporation employs fewer people and, produces less output . Cole - Ohanian show that 60% of the difference between the trend and realized output is due to cartelization and unions . Chari, Kehoe, McGrattan also present a nice exposition that's in line with Cole - Ohanian...</P> <P> This type of analysis has numerous counterarguments including the applicability of the equilibrium business cycle to the Great Depression . </P>

Monetary policy of the federal reserve system great depression