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

  • Michel, DE VROEY

    (UNIVERSITE CATHOLIQUE DE LOUVAIN, Department of Economics)

  • Luca, PENSIEROSO

    (UNIVERSITE CATHOLIQUE DE LOUVAIN, Department of Economics)

Is the Great Depression amenable to real business cycle theory ? In the 1970s and 1980s Lucas and Prescott took an abstentionist stance. They admitted 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, we show that 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 consctructed 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 works of economic historians. We conclude suggesting that historical episodes may exist for which the modelisation method of real business cycle theory is inferior to the ‘tick’ sort of analysis that is proper to econoic historians.

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Paper provided by Université catholique de Louvain, Département des Sciences Economiques in its series Discussion Papers (ECON - Département des Sciences Economiques) with number 2005054.

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Length: 30
Date of creation: 01 Nov 2005
Date of revision:
Handle: RePEc:ctl:louvec:2005054
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  1. 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.
  2. Rees, Albert, 1970. "On Equilibrium in Labor Markets," Journal of Political Economy, University of Chicago Press, vol. 78(2), pages 306-10, March-Apr.
  3. 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.
  4. Lawrence H. Summers, 1986. "Some skeptical observations on real business cycle theory," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Fall, pages 23-27.
  5. 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.
  6. Edward C. Prescott, 1986. "Response to a skeptic," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Fall, pages 28-33.
  7. repec:cup:macdyn:v:3:y:1999:i:2:p:278-91 is not listed on IDEAS
  8. Barry Eichengreen & Peter Temin, 1997. "The Gold Standard and the Great Depression," NBER Working Papers 6060, National Bureau of Economic Research, Inc.
  9. Ben S. Bernanke, 1994. "The Macroeconomics of the Great Depression: A Comparative Approach," NBER Working Papers 4814, National Bureau of Economic Research, Inc.
  10. 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.
  11. Maurice Obstfeld & Kenneth S. Rogoff, 1996. "Foundations of International Macroeconomics," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262150476, June.
  12. Lee Ohanian, 2000. "EconomicDynamics Interviews Lee Ohanian on the Great Depression," EconomicDynamics Newsletter, Review of Economic Dynamics, vol. 1(2), April.
  13. 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.
  14. 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.
  15. Brian Snowdon & Howard Vane, 1998. "Transforming macroeconomics: an interview with Robert E. Lucas Jr," Journal of Economic Methodology, Taylor & Francis Journals, vol. 5(1), pages 115-146.
  16. Lee E. Ohanian, 2001. "Why did productivity fall so much during the Great Depression?," Staff Report 285, Federal Reserve Bank of Minneapolis.
  17. 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.
  18. Luca Pensieroso, 2007. "Real Business Cycle Models Of The Great Depression: A Critical Survey," Journal of Economic Surveys, Wiley Blackwell, vol. 21(1), pages 110-142, 02.
  19. Edward C. Prescott, 1999. "Some observations on the Great Depression," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Win, pages 25-29.
  20. Romer, Christina D., 1992. "What Ended the Great Depression?," The Journal of Economic History, Cambridge University Press, vol. 52(04), pages 757-784, December.
  21. McCallum, Bennett T., 1999. "An Interview With Robert E. Lucas, Jr," Macroeconomic Dynamics, Cambridge University Press, vol. 3(02), pages 278-291, June.
  22. 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.
  23. 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.
  24. 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..
  25. Temin, Peter & Wigmore, Barrie A., 1990. "The end of one big deflation," Explorations in Economic History, Elsevier, vol. 27(4), pages 483-502, October.
  26. 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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