six months, whereas 20 % had been jobless for at least a year. 14 in both cases these were significantly higher figures than the corresponding ones for the recession of the early 1980s. 3. the effectiveness of stabilisation policies given the previously mentioned problems associated with a classical, laissez - faire approach in the presence of a heightened state of uncertainty, government has the responsibility under such circumstances to intervene in order to counteract the potentially devastating effects on the economy. since – as previously mentioned with reference to the period following the stock market collapse of 1929 – situations characterised by a heightened state of uncertainty are also typically associated with a collapse in aggregate demand, the effectiveness of stabilisation policies under these circumstances crucially depends on their ability to stimulate aggregate expenditure. a substantial body of literature has developed in recent decades showing how monetary and fiscal policies can contribute to stabilising income. the literature is based on several alternative approaches, from the so - called “ narrative approach ” originally introduced by milton friedman and anna schwartz in their historical analysis of us monetary policy, 15 to see, e. g., orphanides ( 2003 ). as reported in the financial times of 23 november 2009 ( see “ us feels pain of long - term joblessness ", by sarah o ’ connor ). see friedman and schwartz ( 1963 ). the technically clearest evidence coming from structural vector autoregressions 16 and estimated general equilibrium macroeconomic models. 17 macroeconomic policies can contribute to decrease heightened uncertainty by supporting aggregate demand but also by improving the functioning of markets. as we have seen recently, a key characteristic of such periods is that financial markets ’ normal trading activity tends to become severely impaired, to the point that a significant fraction of operators may even stop trading with one another, thus leading to a credit crunch, and to a further contraction in aggregate demand. under these circumstances, central banks can intervene, for example, by accommodating banks ’ liquidity demand at a pre - specified interest rate, lengthening the maturities of long - term refinancing operations, or expanding the list of assets which banks can use as collateral. all these measures support the functioning of financial markets, thus countering the effects of the credit crunch and ultimately decreasing irreducible uncertainty and supporting aggregate demand. this prevents the economy from entering a recessionary loop, in which the freezing - up of financial markets leads to a contraction of credit, which, in turn, leads to an economic contraction, additional uncertainty

uncertainty prevails at a specific point in time, especially with respect to this third one. there is ample evidence to suggest that the 1930s was a period in which the third type of uncertainty dominated. paul valery, writing in 1931, captured the zeitgeist well : 6 “ instead of, as in the past, playing an honest card game with fate, knowing the rules, knowing the number of cards and face cards, we are now in the position of a player who is astonished to discover that his adversary ’ s hand contains face cards never seen before, and that the rules of the game change with each hand. ” as the magazine of wall street put it a month after black thursday : 7 “ uncertainty is worse than knowing the truth, no matter how bad ”. this was the psychological climate and state of mind franklin roosevelt was referring to when, in his inaugural address as president of the united states in 1933, he stated that “ the only thing we have to fear is fear itself ”. the economic literature confirms the uncertainty prevailing during those days. in their classic monetary history of the united states, 8 friedman and schwartz pointed out that : “ the contraction after 1929 clearly shattered beliefs in a “ new era ”, in the likelihood of longcontinued stability [ … ]. the contraction instilled instead an exaggerated fear of continued economic instability, of the danger of stagnation, of the possibility of recurrent unemployment ”. events such as the 1929 stock market crash, or the september 2008 collapse of lehman brothers, create a vast amount of “ irreducible uncertainty ”, which exerts paralysing effects on spending decisions and may cause the economy to slide into a depression. during the months immediately following the 1929 crash, indeed, both consumer purchases of durable goods and business investment dropped sharply, while spending on perishable goods rose slightly. christina romer ( 1990 ) argues that the most likely explanation for this phenomenon is that the uncertainty generated by the financial crisis induced both consumers and firms to put off purchases of durable and investment goods, respectively, thus causing the economy to stall and contract. the mechanism underlying this “ wait and see ” attitude during periods of heightened uncertainty has been well known since the work of bernanke ( 1983 ), and it has been extensively explored by dixit and pindyck ( 1994 ). the key point is that when a specific purchase is irreversible, as is the case with either investment or durable goods purchases