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Real Business Cycle Theory and the Great Depression: The Abandonment of the Abstentionist Viewpoint

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  • De Vroey Michel R

    ()
    (Department of Economics and IRES, Université catholique de Louvain)

  • Pensieroso Luca

    ()
    (Department of Economics and IRES, Université catholique de Louvain)

Abstract

Is the Great Depression amenable to real business cycle theory? In the 1970s and 1980s Lucas and Prescott took an abstentionist stance. They maintained that, because of its exceptional character, an explanation of the Great Depression was beyond the grasp of the equilibrium approach to the business cycle. However, while Lucas stuck to this view, Prescott changed his mind at the end of the 1990s, breaking his earlier self-imposed restraint. In this paper we document this evolution of opinion and produce a first assessment of real business cycle models of the Great Depression. We claim that the fact of having constructed an equilibrium model of the Great Depression constitutes a methodological breakthrough. However, as far as substance is concerned, we argue that the contribution of real business cycle literature on the Great Depression is slim, and does not gain the upper hand over the work of economic historians.

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Bibliographic Info

Article provided by De Gruyter in its journal The B.E. Journal of Macroeconomics.

Volume (Year): 6 (2006)
Issue (Month): 1 (November)
Pages: 1-26

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Handle: RePEc:bpj:bejmac:v:contributions.6:y:2006:i:1:n:13

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  1. Timothy J. Kehoe & Edward C. Prescott (), 2007. "Great depressions of the twentieth century," Monograph, Federal Reserve Bank of Minneapolis, number 2007gdott.
  2. Bernanke, Ben S, 1995. "The Macroeconomics of the Great Depression: A Comparative Approach," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 27(1), pages 1-28, February.
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  5. Harold L. Cole & Lee E. Ohanian, 2001. "New Deal policies and the persistence of the Great Depression: a general equilibrium analysis," Working Papers 597, Federal Reserve Bank of Minneapolis.
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  7. repec:cup:macdyn:v:3:y:1999:i:2:p:278-91 is not listed on IDEAS
  8. Rees, Albert, 1970. "On Equilibrium in Labor Markets," Journal of Political Economy, University of Chicago Press, vol. 78(2), pages 306-10, March-Apr.
  9. Edward C. Prescott, 1986. "Response to a skeptic," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Fall, pages 28-33.
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  11. Edward C. Prescott, 1999. "Some observations on the Great Depression," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Win, pages 25-29.
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  14. Lucas, Robert E, Jr & Rapping, Leonard A, 1972. "Unemployment in the Great Depression: Is There a Full Explanation?," Journal of Political Economy, University of Chicago Press, vol. 80(1), pages 186-91, Jan.-Feb..
  15. Harold L. Cole & Lee E. Ohanian, 2001. "Re-Examining the Contributions of Money and Banking Shocks to the U.S. Great Depression," NBER Chapters, in: NBER Macroeconomics Annual 2000, Volume 15, pages 183-260 National Bureau of Economic Research, Inc.
  16. Christina D. Romer, 1988. "The Great Crash and the Onset of the Great Depression," NBER Working Papers 2639, National Bureau of Economic Research, Inc.
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  18. Michel, DE VROEY, 2005. "Involuntary Unemployment : the Elusive Quest for a Theory," Discussion Papers (ECON - Département des Sciences Economiques) 2005004, Université catholique de Louvain, Département des Sciences Economiques.
  19. Edward C. Prescott, 1983. ""Can the cycle be reconciled with a consistent theory of expectations?" - or a progress report on business cycle theory," Working Papers 239, Federal Reserve Bank of Minneapolis.
  20. Yngve Abrahamsen & Roland Aeppli & Erdal Atukeren & Michael Graff & Christian Müller & Bernd Ships, 2005. "The Swiss Disease: Facts and Artefacts, A Reply to Kehoe and Prescott," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 8(3), pages 749-758, July.
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Cited by:
  1. Luca, PENSIEROSO, 2007. "The Great Depression in Belgium from a Neo-Classical Perspective," Discussion Papers (ECON - Département des Sciences Economiques) 2007025, Université catholique de Louvain, Département des Sciences Economiques.
  2. Timothy J. Kehoe & Edward C. Prescott, 2008. "Using the general equilibrium growth model to study great depressions: a reply to Temin," Staff Report 418, Federal Reserve Bank of Minneapolis.
  3. Brian Snowdon, 2007. "The New Classical Counter-Revolution: False Path or Illuminating Complement?," Eastern Economic Journal, Eastern Economic Association, vol. 33(4), pages 541-562, Fall.
  4. Luca PENSIEROSO, 2010. "The Great Depression in Belgium: an Open-Economy Analysis," Discussion Papers (IRES - Institut de Recherches Economiques et Sociales) 2010023, Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES).
  5. Eduardo Sanchez Astorino & Mauro Rodrigues Junior, 2014. "The Great Depression In Brazil," Anais do XL Encontro Nacional de Economia [Proceedings of the 40th Brazilian Economics Meeting] 035, ANPEC - Associação Nacional dos Centros de Pósgraduação em Economia [Brazilian Association of Graduate Programs in Economics].

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