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Accounting for the Great Depression

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Author Info
V. V. Chari
Patrick J. Kehoe
Ellen R. McGrattan

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Abstract

Economists have offered many theories for the U.S. Great Depression, but no consensus has formed on the main forces behind it. Here we describe and demonstrate a simple methodology for determining which theories are the most promising. We show that a large class of models, including models with various frictions, are equivalent to a prototype growth model with time-varying efficiency, labor, and investment wedges that, at least on face value, look like time-varying productivity, labor taxes, and investment taxes. We use U.S. data to measure these wedges, feed them back into the prototype growth model, and assess the fraction of the fluctuations in 1929?39 that they account for. We find that the efficiency and labor wedges account for essentially all of the decline and subsequent recovery. Investment wedges play, at best, a minor role. This article originally appeared in the American Economic Review. (c) American Economic Association. ; RELATED PAPER: Staff Report 328 Business Cycle Accounting

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Publisher Info
Article provided by Federal Reserve Bank of Minneapolis in its journal Quarterly Review.

Volume (Year): (2003)
Issue (Month): Spr ()
Pages: 2-8
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Handle: RePEc:fip:fedmqr:y:2003:i:spr:p:2-8:n:v.27no.2

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Keywords: Depressions;

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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. Casey B. Mulligan, 2002. "A Dual Method of Empirically Evaluating Dynamic Competitive Equilibrium Models with Market Distortions, Applied to the Great Depression & World War II," NBER Working Papers 8775, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  2. Carlstrom, Charles T & Fuerst, Timothy S, 1997. "Agency Costs, Net Worth, and Business Fluctuations: A Computable General Equilibrium Analysis," American Economic Review, American Economic Association, vol. 87(5), pages 893-910, December. [Downloadable!] (restricted)
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  3. Bernanke, Ben & Gertler, Mark, 1989. "Agency Costs, Net Worth, and Business Fluctuations," American Economic Review, American Economic Association, vol. 79(1), pages 14-31, March. [Downloadable!] (restricted)
  4. Michael D. Bordo & Christopher J. Erceg & Charles L. Evans, 2000. "Money, Sticky Wages, and the Great Depression," American Economic Review, American Economic Association, vol. 90(5), pages 1447-1463, December. [Downloadable!] (restricted)
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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. [Downloadable!]
    Other versions:
  6. V. V. Chari & Patrick J. Kehoe & Ellen R. McGrattan, 2002. "Business cycle accounting," Working Papers 625, Federal Reserve Bank of Minneapolis.
    Other versions:
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