DP136 | The Economic Consequences of the Franc Poincare

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Following the fiscal stabilisation of 1926 and the accompanying return of the French franc to the Gold Standard, France enjoyed several years of fast growth and remained immune to the effects of the Great Depression until early 1931. Accounts of this period emphasize the undervaluation of the Franc Poincare of 1926 and the attendant export-led recovery. The undervaluation of the franc, in turn, is largely related to monetary policy. We show that exports cannot account for the delayed onslaught of the Great Depression and identify investment as the proximate driving force. We also claim that fiscal policy played a major role explaining simultaneously the undervaluation of the franc and the investment boom. The paper presents a dynamic model of fiscal policy as well as supporting empirical evidence.