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A Dual Method of Empirically Evaluating Dynamic Competitive Equilibrium Models with Market Distortions, Applied to the Great Depression & World War II

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Casey B. Mulligan

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Abstract

I prove some theorems for competitive equilibria in the presence of market distortions, and use those theorems to motivate an algorithm for (simply and exactly) computing and empirically evaluating competitive equilibria for dynamic economies. Although a competitive equilibrium models interactions between all sectors, all consumer types, and all time periods, I show how my algorithm permits separate empirical evaluation of these pieces of the model and hence is practical even when very little data is available. I then compute a neoclassical growth model with distortionary taxes that fits aggregate U.S. time series for the period 1929-50 and conclude that, if it is to explain aggregate behavior during the period, government policy must have heavily taxed labor income during the Great Depression and lightly taxed it during the war. In other words, the challenge for the competitive equilibrium approach is not so much why output might change over time, but why the marginal product of labor and the marginal value of leisure diverged so much and why that wedge persisted so long. In this sense, explaining aggregate behavior during the period has been reduced to a public finance question -- were actual government policies distorting behavior in the same direction and magnitude as government policies in the model?

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 8775.

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Date of creation: Feb 2002
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Handle: RePEc:nbr:nberwo:8775

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H30 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - General
C68 - Mathematical and Quantitative Methods - - Mathematical Methods and Programming - - - Computable General Equilibrium Models

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  1. Diego Restuccia & Dennis Tao Yang & Xiaodong Zhu, 2003. "Agriculture and Aggregate Productivity: A Quantitative Cross-Country Analysis," Working Papers diegor-03-01, University of Toronto, Department of Economics. [Downloadable!]
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  2. Mario J. Crucini & James Kahn, 2003. "Tariffs and the Great Depression Revisited," Working Papers 0316, Department of Economics, Vanderbilt University. [Downloadable!]
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  3. Lawrence J. Christiano & Joshua M. Davis, 2006. "Two Flaws In Business Cycle Accounting," NBER Working Papers 12647, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  4. V. V. Chari & Patrick J. Kehoe & Ellen R. McGrattan, 2002. "Accounting for the Great Depression," American Economic Review, American Economic Association, vol. 92(2), pages 22-27, May. [Downloadable!]
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  5. Gauti B. Eggertsson, 2006. "Was the New Deal contractionary?," Staff Reports 264, Federal Reserve Bank of New York. [Downloadable!]
  6. Gao, Xu, 2007. "Business Cycle Accounting for the Chinese Economy," MPRA Paper 7050, University Library of Munich, Germany, revised Dec 2007. [Downloadable!]
  7. Lawrence J. Christiano & Joshua M. Davis, 2006. "Two flaws in business cycle dating," Working Paper 0612, Federal Reserve Bank of Cleveland. [Downloadable!]
  8. Lawrence J. Christiano & Roberto Motto & Massimo Rostagno, 2004. "The Great Depression and the Friedman-Schwartz Hypothesis," NBER Working Papers 10255, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  9. V. V. Chari & Patrick J. Kehoe & Ellen R. McGrattan, 2006. "Business cycle accounting," Staff Report 328, Federal Reserve Bank of Minneapolis. [Downloadable!]
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  10. KOBAYASHI Keiichiro & INABA Masaru (RIETI), 2007. "Debt-Ridden Equilibria - A Simple Theory of Great Depressions -," Discussion papers 07035, Research Institute of Economy, Trade and Industry (RIETI). [Downloadable!]
  11. Keiichiro Kobayashi & Masaru Inaba, 2006. "Borrowing constraints and protracted recessions," Discussion papers 06011, Research Institute of Economy, Trade and Industry (RIETI). [Downloadable!]
  12. Casey B. Mulligan, 2004. "Robust Aggregate Implications of Stochastic Discount Factor Volatility," NBER Working Papers 10210, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  13. Chakraborty, Suparna, 2008. "Indian Economic Growth: Lessons for the Emerging Economies," Working Papers RP2008/67, World Institute for Development Economic Research (UNU-WIDER). [Downloadable!]
  14. Keiichiro Kobayashi & Masaru Inaba, 2005. "Business Cycle Accounting for the Japanese Economy," Discussion papers 05023, Research Institute of Economy, Trade and Industry (RIETI). [Downloadable!]
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  15. Lawrence J. Christiano & Joshua M. Davis, 2006. "Two flaws in business cycle accounting," Working Paper Series WP-06-10, Federal Reserve Bank of Chicago. [Downloadable!]
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