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

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  • Michel, DE VROEY

    (UNIVERSITE CATHOLIQUE DE LOUVAIN, Department of Economics)

  • Luca, PENSIEROSO

    (UNIVERSITE CATHOLIQUE DE LOUVAIN, Department of Economics)

Abstract

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.

Suggested Citation

  • Michel, DE VROEY & Luca, PENSIEROSO, 2005. "Real Business Cycle Theory and the Great Depression : The Abandonment of the Absentionist Viewpoint," Discussion Papers (ECON - Département des Sciences Economiques) 2005054, Université catholique de Louvain, Département des Sciences Economiques.
  • Handle: RePEc:ctl:louvec:2005054
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    References listed on IDEAS

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    Cited by:

    1. Eduardo Sanchez Astorino & Mauro Rodrigues Junior, 2014. "The Great Depression In Brazil," Anais do XL Encontro Nacional de Economia [Proceedings of the 40th Brazilian Economics Meeting] 035, ANPEC - Associação Nacional dos Centros de Pós-Graduação em Economia [Brazilian Association of Graduate Programs in Economics].
    2. Luca Pensieroso, 2011. "Real business cycle models of the Great Depression," Cliometrica, Journal of Historical Economics and Econometric History, Association Française de Cliométrie (AFC), vol. 5(2), pages 101-119, June.
    3. Michel DeVroey, 2012. "Dead or Alive? The Ebbs and Flows of Keynesianism Over the History of Macroeconomics," Chapters,in: Keynes’s General Theory, chapter 4 Edward Elgar Publishing.
    4. 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.
    5. Luca Pensieroso, 2011. "The Great Depression in Belgium from a Neoclassical Perspective," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 14(2), pages 389-402, Arpil.
    6. 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.
    7. Franck Portier, 2008. "Interprétation d'épisodes historiques à l'aide de modèles dynamiques stochastiques d'équilibre général," Economie & Prévision, La Documentation Française, vol. 0(4), pages 33-46.
    8. Luca PENSIEROSO, 2010. "The Great Depression in Belgium: an Open-Economy Analysis," Discussion Papers (IRES - Institut de Recherches Economiques et Sociales) 2010023, Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES).

    More about this item

    Keywords

    Great Depression; New Classical Marcroeconomics; Real Business Cycle Theory; Equilibrium; Unemployment;

    JEL classification:

    • B22 - Schools of Economic Thought and Methodology - - History of Economic Thought since 1925 - - - Macroeconomics
    • N10 - Economic History - - Macroeconomics and Monetary Economics; Industrial Structure; Growth; Fluctuations - - - General, International, or Comparative
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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