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

  • De Vroey Michel R

    ()

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

  • Pensieroso Luca

    ()

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

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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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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  9. 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..
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  19. Edward C. Prescott, 1986. "Response to a skeptic," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Fall, pages 28-33.
  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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