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

Michel De Vroey and Luca Pensieroso

No 2005054, Discussion Papers (ECON - Département des Sciences Economiques) from Université catholique de Louvain, Département des Sciences Economiques

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.

Keywords: Great Depression; New Classical Marcroeconomics; Real Business Cycle Theory; Equilibrium; Unemployment (search for similar items in EconPapers)
JEL-codes: B22 E32 N10 (search for similar items in EconPapers)
Pages: 30
Date: 2005-11-01
New Economics Papers: this item is included in nep-dge, nep-his and nep-mac
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Citations: View citations in EconPapers (1)

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Journal Article: Real Business Cycle Theory and the Great Depression: The Abandonment of the Abstentionist Viewpoint (2006)
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