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

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Author Info
Michel R. De Vroey (Department of Economics and IRES, Université catholique de Louvain)
Luca Pensieroso (Department of Economics and IRES, Université catholique de Louvain)

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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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Publisher Info
Article provided by Berkeley Electronic Press in its journal The B.E. Journal of Macroeconomics.

Volume (Year): contributions.6 (2006)
Issue (Month): 1 ()
Pages:
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Handle: RePEc:bpj:bejmac:v:contributions.6:y:2006:i:1:n:13

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Related research
Keywords: great depression; new classical macroeconomics; real business cycle theory; equilibrium; unemployment;

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Find related papers by JEL classification:
B22 - Schools of Economic Thought and Methodology - - History of Economic Thought since 1925 - - - Macroeconomics
N10 - Economic History - - Macroeconomics and Monetary Economics; Growth and Fluctuations - - - General, International, or Comparative
E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

  1. Christina D. Romer, 1991. "What Ended the Great Depression?," NBER Working Papers 3829, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  2. McCallum, Bennett T., 1999. "An Interview With Robert E. Lucas, Jr," Macroeconomic Dynamics, Cambridge University Press, vol. 3(02), pages 278-291, June. [Downloadable!]
  3. Harold L. Cole & Lee E. Ohanian, 2004. "New Deal Policies and the Persistence of the Great Depression: A General Equilibrium Analysis," Journal of Political Economy, University of Chicago Press, vol. 112(4), pages 779-816, August.
    Other versions:
  4. Timothy J. Kehoe & Edward C. Prescott, 2002. "Great Depressions of the Twentieth Century," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 5(1), pages 1-18, January. [Downloadable!] (restricted)
    Other versions:
  5. Edward C. Prescott, 1986. "Response to a skeptic," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Fall, pages 28-33. [Downloadable!]
  6. Harold L. Cole & Lee E. Ohanian, 2000. "Re-examining the contributions of money and banking shocks to the U.S. Great Depression," Staff Report 270, Federal Reserve Bank of Minneapolis. [Downloadable!]
    Other versions:
  7. Harold L. Cole & Lee E. Ohanian, 2002. "The U.S. and U.K. Great Depressions Through the Lens of Neoclassical Growth Theory," American Economic Review, American Economic Association, vol. 92(2), pages 28-32, May. [Downloadable!]
  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. [Downloadable!] (restricted)
  9. 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. [Downloadable!]
  10. repec:cup:macdyn:v:3:y:1999:i:2:p:278-91 is not listed on IDEAS
  11. Snowdon, Brian & Vane, Howard R, 1998. "Transforming Macroeconomics: An Interview with Robert E. Lucas Jr," Journal of Economic Methodology, Taylor and Francis Journals, vol. 5(1), pages 115-46, June.
  12. Edward C. Prescott, 1999. "Some observations on the Great Depression," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Win, pages 25-29. [Downloadable!]
  13. Lawrence H. Summers, 1986. "Some skeptical observations on real business cycle theory," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Fall, pages 23-27. [Downloadable!]
  14. 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. [Downloadable!]
  15. 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. [Downloadable!] (restricted)
  16. Lee E. Ohanian, 2002. "Why did productivity fall so much during the Great Depression?," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Spr. [Downloadable!]
    Other versions:
  17. 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. [Downloadable!] (restricted)
    Other versions:
  18. Harold L. Cole & Lee E. Ohanian, 1999. "The Great Depression in the United States from a neoclassical perspective," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Win, pages 2-24. [Downloadable!]
  19. Luca, PENSIEROSO, 2005. "Real Business Cycle Models of the Great Depression : a Critical Survey," Discussion Papers (ECON - Département des Sciences Economiques) 2005005, Université catholique de Louvain, Département des Sciences Economiques. [Downloadable!]
    Other versions:
  20. 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.. [Downloadable!] (restricted)
  21. Temin, Peter & Wigmore, Barrie A., 1990. "The end of one big deflation," Explorations in Economic History, Elsevier, vol. 27(4), pages 483-502, October. [Downloadable!] (restricted)
  22. Barry Eichengreen & Peter Temin, 1997. "The Gold Standard and the Great Depression," NBER Working Papers 6060, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  23. Lee Ohanian, 2000. "EconomicDynamics Interviews Lee Ohanian on the Great Depression," EconomicDynamics Newsletter, Review of Economic Dynamics, vol. 1(2), April. [Downloadable!]
  24. Romer, Christina D, 1990. "The Great Crash and the Onset of the Great Depression," The Quarterly Journal of Economics, MIT Press, vol. 105(3), pages 597-624, August. [Downloadable!] (restricted)
    Other versions:
  25. Lucas, Robert E, Jr & Rapping, Leonard A, 1969. "Real Wages, Employment, and Inflation," Journal of Political Economy, University of Chicago Press, vol. 77(5), pages 721-54, Sept./Oct. [Downloadable!] (restricted)
Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. 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. [Downloadable!]
  2. 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. [Downloadable!]
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