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Creator: Mulligan, Casey B. Series: Great depressions of the twentieth century Abstract:
I prove some theorems for competitive equilibria in the presence of distortionary taxes and other restraints of trade, and use those theorems to motivate an algorithm for (exactly) computing and empirically evaluating competitive equilibria in dynamic economies. Although its economics is relatively sophisticated, the algorithm is so computationally economical that it can be implemented with a few lines in a spreadsheet. 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. For similar reasons, these evaluations are not particularly sensitive to how data is partitioned into "trends" and "cycles." I then compute a real business cycle 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?
Parola chiave: Depressions, Taxes, World War 2, and Competitive equilibrium models Soggetto: H30 - Fiscal Policies and Behavior of Economic Agents: General, E32 - Business Fluctuations; Cycles, and C68 - Computable General Equilibrium Models
Creator: Perri, Fabrizio and Quadrini, Vincenzo Series: Great depressions of the twentieth century Abstract:
We analyze the Italian economy in the interwar years. In Italy, as in many other countries, the years immmediately after 1929 were characterized by a major slowdown in economic activity as non farm output declined almost 12. We argue that the slowdown cannot be explained solely by productivity shocks and that other factors must have contributed to the depth and duration of the the 1929 crisis. We present a model in which trade restrictions together with wage rigidities produce a slowdown in economic activity that is consistent with the one observed in the data. The model is also consistent with evidence from sectorial disaggregated data. Our model predicts that trade restrictions can account for about 3/4 of the observed slowdown while wage rigidity (monetary shocks) can account for the remaining fourth.
Parola chiave: Wage rigidity, Italy, Depressions, and Trade restrictions Soggetto: N14 - Economic History: Macroeconomics and Monetary Economics; Industrial Structure; Growth; Fluctuations: Europe: 1913- and E32 - Business Fluctuations; Cycles
Creator: Kehoe, Timothy Jerome, 1953- and Prescott, Edward C. Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 418 Abstract:
Three of the arguments made by Temin (2008) in his review of Great Depressions of the Twentieth Century are demonstrably wrong: that the treatment of the data in the volume is cursory; that the definition of great depressions is too general and, in particular, groups slow growth experiences in Latin America in the 1980s with far more severe great depressions in Europe in the 1930s; and that the book is an advertisement for the real business cycle methodology. Without these three arguments — which are the results of obvious conceptual and arithmetical errors, including copying the wrong column of data from a source — his review says little more than that he does not think it appropriate to apply our dynamic general equilibrium methodology to the study of great depressions, and he does not like the conclusion that we draw: that a successful model of a great depression needs to be able to account for the effects of government policy on productivity.
Parola chiave: General equilibrium models, Economic fluctuations, and Depressions Soggetto: N10 - Economic History: Macroeconomics and Monetary Economics; Industrial Structure; Growth; Fluctuations: General, International, or Comparative and E32 - Business Fluctuations; Cycles
Creator: Prescott, Edward C. Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 527 Abstract:
This essay reviews the development of neoclassical growth theory, a unified theory of aggregate economic phenomena that was first used to study business cycles and aggregate labor supply. Subsequently, the theory has been used to understand asset pricing, growth miracles and disasters, monetary economics, capital accounts, aggregate public finance, economic development, and foreign direct investment.
The focus of this essay is on real business cycle (RBC) methodology. Those who employ the discipline behind the methodology to address various quantitative questions come up with essentially the same answer—evidence that the theory has a life of its own, directing researchers to essentially the same conclusions when they apply its discipline. Deviations from the theory sometimes arise and remain open for a considerable period before they are resolved by better measurement and extensions of the theory. Elements of the discipline include selecting a model economy or sometimes a set of model economies. The model used to address a specific question or issue must have a consistent set of national accounts with all the accounting identities holding. In addition, the model assumptions must be consistent across applications and be consistent with micro as well as aggregate observations. Reality is complex, and any model economy used is necessarily an abstraction and therefore false. This does not mean, however, that model economies are not useful in drawing scientific inference.
The vast number of contributions made by many researchers who have used this methodology precludes reviewing them all in this essay. Instead, the contributions reviewed here are ones that illustrate methodological points or extend the applicability of neoclassical growth theory. Of particular interest will be important developments subsequent to the Cooley (1995) volume, Frontiers of Business Cycle Research. The interaction between theory and measurement is emphasized because this is the way in which hard quantitative sciences progress.
Parola chiave: Development, Aggregate economic theory, Prosperities, RBC methodology, Aggregation, Aggregate financial economics, Neoclassical growth theory, Business cycle fluctuations, and Depressions Soggetto: E00 - Macroeconomics and Monetary Economics: General, C10 - Econometric and Statistical Methods and Methodology: General, E60 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook: General, E13 - General Aggregative Models: Neoclassical, E32 - Business Fluctuations; Cycles, and B40 - Economic Methodology: General