This appendix contains seven sections. Section A reports results from running regressions of labor earnings on GDP using data from the PSID, for comparison with the results using HRS data in the body of the paper. Section B examines the relationship between family income, aggregate shocks, and risk preferences in the PSID. Section C gives technical details on the Markov Chain Monte Carlo estimation employed in table 1 of the paper and reports the complete parameter estimates for the regressions summarized in that table. Section D reports results when the relationship between earnings and aggregate shocks is estimated with individual-specific coecients rather than common coecients for each risk-tolerance group. Section E reports results comparable to table 1 of the paper and table D.1 of this appendix using only Social Security covered earnings instead of the
combination of Social Security and W-2 earnings. Section F reports robustness checks for tables 2 and 3 of the paper under alternative definitions of the household and the consumption and income variables. Section G reports robustness checks for tables 2 and 3 under an alternative definition of the leisure variable.
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.
In 2008, Peter Temin wrote a review of the book that appeared in the Journal of Economic Literature. This staff report and accompanying data file are in response to the review.
Citation for review: Temin, Peter. 2008. "Real Business Cycle Views of the Great Depression and Recent Events: A Review of Timothy J. Kehoe and Edward C. Prescott's Great Depressions of the Twentieth Century." Journal of Economic Literature, 46 (3): 669-84. DOI: https://doi.org/10.1257/jel.46.3.669
This file contains a listing of all banks that existed in the United States between 1784 and 1860 along with their opening and closing dates. Further, if a bank went out of existence, its disposition – whether it closed, failed, or other – is given. For the methodology to obtain beginning and ending dates see Weber, Warren E., “Early State Banks in the United States: How Many Were There and When Did They Exist?” Journal of Economic History, 433–455, June 2006.
Data supporting the chapter "Prosperity and Depression." The file Ely-Sources.xls contains the original data and constructed series used to generate the Tables 1 to 6 and the Figures 1 to 3. Each of the nine objects has its own worksheet in the file. For example the worksheet that contains series used to generate figure 1 in the paper, is entitled Fig 1. In each worksheet, original series are labeled On and constructed series are labeled Cn. Constructed series Cn are obtained from the original and/or other constructed series in the respective worksheet.
In this paper we will consider a simple small open economy with three assets - domestic capital, foreign securities and public debt - to study the government's incentives to devalue and to repay or default the debt. We show that the announcement of a devaluation is anticipated by domestic agents who reduce domestic investments and increase foreign holdings. Once a government devalues, the expectations vanish and the economy recovers its past levels of investment and GDP. However, in a country with international debt denominated in US dollars if a government devalues it requires a higher fraction of GDP to repay its external debt. In consequence, there exists a trade-off between recovering the economy and increasing the future cost of repaying the debt. Our main result is to show that, as devaluation beliefs exists, a devaluation increase government incentives to default and devalue. We calibrate our model to match the decrease in investment of domestic capital, the reduction in production, the increase in trade balance surplus, and the increase in debt levels observed throughout 2001 in Argentina. We show that for a probability of devaluation consistent with the risk premium of the Argentinian Government bonds nominated in dollars issued on April 2001 the external debt of Argentina was in a crisis zone were the government find optimal to default and to devalue.
We estimate the effects of policy distortions on aggregate productivity. Based on a model of plant production and productivity uncertainty and heterogeneity, and using Chilean manufacturing data, we focus on the effect of taxation on the exit behavior of plants. We find that taxes do distort the liquidation decisions of firms, suggesting that policy distortions reduce the extent to which factors are reallocated towards the most productive plants. Our results have important consequences for growth and development, as policies that alter the measure of plants that operate in equilibrium change the short-run response of output to exogenous shocks and the long run level of aggregate TFP. In particular, we find that the amount of productivity lost due to excessive plant shutdowns are very large.
In most developed countries, housing receives preferential tax treatment relative to other assets. In particular (i) the housing services provided by owner-occupied housing (generally referred to as imputed rents) are untaxed and (ii) mortgage interest payments reduce taxable income. The potential economic distortions resulting from the unique treatment of housing may be substantial, especially in light of the fact that residential capital accounts for more than half of the assets in the U.S. In particular, this tax treatment distorts the households' portfolio composition, their saving rates and their tenure choice. In this paper we build a general equilibrium model populated by heterogeneous agents subject to idiosyncratic risk. We use this framework to quantitatively assess the macroeconomic and distributional distortions introduced by this preferential tax treatment. We also study the effects of alternative tax schemes which could correct the current system's bias.
"Sudden Stops " experienced during emerging markets crises are characterized by large reversals of capital inflows and the current account, deep recessions, and collapses in asset prices. This paper proposes an open-economy equilibrium asset pricing model in which financial frictions cause Sudden Stops. Margin requirements impose a collateral constraint on foreign borrowing by domestic agents and trading costs distort asset trading by foreign securities firms. At equilibrium, margin constraints may or may not bind depending on portfolio decisions and equilibrium asset prices. If margin constraints do not bind, productivity shocks cause a moderate fall in consumption and a widening current account deficit. If debt is high relative to asset holdings, the same productivity shocks trigger margin calls forcing domestic agents to fire-sell equity to foreign traders. This sets off a Fisherian asset-price deflation and subsequent rounds of margin calls. A current account reversal and a collapse in consumption occur when equity sales cannot prevent a sharp rise in net foreign assets.
Entrepreneurs bear substantial risk, but empirical evidence shows no sign of a positive premium. This paper develops a theory of endogenous entrepreneurial risk taking that explains why self-financed entrepreneurs may find it optimal to invest into risky projects offering no risk premium. The model has also a number of implications for firm dynamics supported by empirical evidence, such as a positive correlation between survival, size, and firm age.
This paper is the first of a series of explorations in the relative performance and sources of productivity growth of U.S. businesses across industries and legal structure. In order to assemble the disparate data from various sources to develop a coherent productivity database, we developed a general system to manage data. The paper describes this system and then applies it by building such a database. The paper presents updated estimates of gross output, intermediate input use and value added using the BEA=s GPO data set. It supplements these data with estimates of missing data on intermediate input use and prices for the 1977-1986 period, and it concords these data, which are organized on a 1972 SIC basis, to the 1987 SIC in order to have consistent time series covering the last twenty-four years. It further refines these data by disaggregating them by legal form of organization. The paper also presents estimates of labor hours, investment, capital services and, consequently, multifactor productivity disaggregated by industry and legal form of organization, and it analyzes the contribution of various industries and business organizations to aggregate productivity. The paper also reconsiders these estimates in light of the surge in spending in advance of the century-date change.
Trend-cycle decomposition has been problematic in equilibrium business cycle research. Many models are fundamentally based on the concept of balanced growth, and so have clear predictions concerning the nature of the multivariate trend that should exist in the data if the model is correct. But the multivariate trend that is removed from the data in this literature is not the same one that is predicted by the model. This is understandable, because unexpected changes in trends are difficult to model under a rational expectations assumption. A learning assumption is more appropriate here. We include learning in a standard equilibrium business cycle model with explicit growth. We ask how the economy might react to the important trend-changing events of the postwar era in industrialized economies, such as the productivity slowdown, increased labor force participation by women, and the "new economy" of the 1990s. This tells us what the model says about the trend that should be taken out of the data before the business cycle analysis begins. Thus we use learning to address the trend-cycle decomposition problem that plagues equilibrium business cycle research. We argue that a model-consistent approach, such as the one we suggest here, is necessary if the goal is to obtain an accurate assessment of an equilibrium business cycle model.
We add a nominal tax system to a sticky-price monetary business cycle model. When nominal interest income is taxed, the coefficient on inflation in a Taylor-type monetary policy rule must be significantly larger than one in order for the model economy to have a determinate rational expectations equilibrium. When depreciation is treated as a charge against taxable income, an even larger weight on inflation is required in the Taylor rule in order to obtain a determinate and stable equilibrium. These results have obvious implications for assessing the historical conduct of monetary policy.
This paper examines data on point and probabilistic forecasts of inflation from the Survey of Professional Forecasters. We use this data to evaluate current strategies for the empirical modeling of forecast behavior. In particular, the analysis principally focuses on the relationship between ex post forecast errors and ex ante measures of uncertainty in order to assess the reliability of using proxies based on predictive accuracy to describe changes in predictive confidence. After we adjust the data to account for certain features in the conduct and construct of the survey, we find a significant and robust correlation between observed heteroskedasticity in the consensus forecast errors and forecast uncertainty. We also document that significant compositional effects are present in the data that are economically important in the case of forecast uncertainty, and may be related to differences in respondents' access to information.
The durable goods sector is much more interest sensitive than the non-durables sector, and these sectoral differences have important implications for monetary policy. In this paper, we perform VAR analysis of quarterly US data and find that a monetary policy innovation has a peak impact on durable expenditures that is roughly five times as large as its impact on non-durable expenditures. We then proceed to formulate and calibrate a two-sector dynamic general equilibrium model that roughly matches the impulse response functions of the data. We derive the social welfare function and show that the optimal monetary policy rule responds to sector-specific inflation rates and output gaps. We show that some commonlyprescribed policy rules perform poorly in terms of social welfare, especially rules that put a higher weight on inflation stabilization than on output gap stabilization. By contrast, it is interesting that certain rules that react only to aggregate variables, including aggregate output gap targeting and rules that respond to a weighted average of price and wage inflation, may yield a welfare level close to the optimum given a typical distribution of shocks.
We report estimates of the dynamic effects of a technology shock, and then use these to estimate the parameters of a dynamic general equilibrium model with money. We find: (i) a positive technology shock drives up hours worked, consumption, investment and output; (ii) the positive response of hours worked reflects that the Fed has in practice accommodated technology shocks; (iii) model parameter values and functional forms that match the response of macroeconomic variables to monetary policy shocks also work well for technology shocks; (iv) while technology shocks account for a large fraction of the lower frequency component of economic fluctuations, they account for only a small part of the business cycle component of fluctuations.
This paper proposes a simple method for guiding researchers in developing quantitative models of economic fluctuations. We show that a large class of models, including models with various frictions, are equivalent to a prototype growth model with time varying wedges that, at least on face value, look like time-varying productivity, labor taxes, and capital income taxes. We label the time varying wedges as efficiency wedges, labor wedges, and investment wedges. We use data to measure these wedges and then feed them back into the prototype growth model. We then assess the fraction of fluctuations accounted for by these wedges during the great depressions of the 1930s in the United States, Germany, and Canada. We find that the efficiency and labor wedges in combination account for essentially all of the declines and subsequent recoveries. Investment wedge plays at best a minor role.
This paper presents a method to perform likelihood-based inference in nonlinear dynamic equilibrium economies. This type of models has become a standard tool in quantitative economics. However, existing literature has been forced so far to use moment procedures or linearization techniques to estimate these models. This situation is unsatisfactory: moment procedures suffer from strong small samples biases and linearization depends crucially on the shape of the true policy functions, possibly leading to erroneous answers. We propose the use of Sequential Monte Carlo methods to evaluate the likelihood function implied by the model. Then we can perform likelihood-based inference, either searching for a maximum (Quasi-Maximum Likelihood Estimation) or simulating the posterior using a Markov Chain Monte Carlo algorithm (Bayesian Estimation). We can also compare different models even if they are nonnested and misspecified. To perform classical model selection, we follow Vuong (1989) and use the Kullback-Leibler distance to build Likelihood Ratio Tests. To perform Bayesian model comparison, we build Bayes factors. As an application, we estimate the stochastic neoclassical growth model.
A necessary feature for equilibrium is that beliefs about the behavior of other agents are rational. We argue that in stationary OLG environments this implies that any future generation in the same situation as the initial generation must do as well as the initial generation did in that situation. We conclude that the existing equilibrium concepts in the literature do not satisfy this condition. We then propose an alternative equilibrium concept, organizational equilibrium, that satisfies this condition. We show that equilibrium exists, it is unique, and it improves over autarky without achieving optimality. Moreover, the equilibrium can be readily found by solving a maximization program.
In this paper we make the following three claims. (1), in contradiction with the conventional view according to which the French depression was very different to that observed in the US, we argue that there are more similarities than differences between the French and U.S. experiences and therefore a common explanation should be sought. (2), poor growth in technological opportunities appear neither necessary nor sufficient to account for the French depression. (3), changes in institutional and market regulation appear necessary to account for the overall changes observed over the period. Moreover, we show that the size of these institutional changes may by themselves be enough to quantatively explain the French depression. However, at this time, we have no theory to explain the size or the timing of these changes.
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?
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.
Monetary policy research using time series methods has been criticized for using more information than the Federal Reserve had available in setting policy. To quantify the role of this criticism, we propose a method to estimate a VAR with real-time data while accounting for the latent nature of many economic variables, such as output. Our estimated monetary policy shocks are closely correlated with a typically estimated measure. The impulse response functions are broadly similar across the methods. Our evidence suggests that the use of revised data in VAR analyses of monetary policy shocks may not be a serious limitation.
There are two striking aspects of the recovery from the Great Depression in the United States: the recovery was very weak and real wages in several sectors rose significantly above trend. These data contrast sharply with neoclassical theory, which predicts a strong recovery with low real wages. We evaluate whether New Deal cartelization policies designed to limit competition among firms and increase labor bargaining power can account for the persistence of the Depression. We develop a model of the intraindustry bargaining process between labor and firms that occurred with these policies, and embed that model within a multi-sector dynamic general equilibrium model. We find that New Deal cartelization policies are an important factor in accounting for the post-1933 Depression. We also find that the key depressing element of New Deal policies was not collusion per se, but rather the link between paying high wages and collusion.
This spreadsheet contains the disaggregated national bank call reports by state and reserve city for each call report date. These data appear as compiled by the Comptroller of the Currency. These data are a “cleaned” version of the data published in the Annual Reports of the Comptroller of the Currency. Where assets and liabilities were not equal for a state or reserve city in the original, they have been corrected to be equal in this data set. This was done by comparing for each asset and liability category differences between totals as reported by the Comptroller and totals category obtained by aggregating the individual state and reserve city data. It should also be noted that aggregates for the entire National Banking System should be based on the individual data in this dataset and not those reported by the Comptroller. After 1900 the dates for the data for Alaska and Hawaii that the Comptroller used in his totals do not match the dates given in the individual state reports.
Interbank payment data for Pennsylvania, 1842-1859. Data accompanies Warren Weber's 2003 Journal of Monetary Economics article "Interbank payments relationships in the antebellum United States : evidence from Pennsylvania."
The process by which per capita income in the South converged to northern levels is intimately related to the structural transformation of the U.S. economy. We find that empirically most of the southern gains are attributable to the nation-wide convergence of agricultural wages to non-agricultural wages, and the faster rate of transition of the Southern labor force from agricultural to non-agricultural jobs. Similar results describe the Mid-West's catch up to the North-East (but not the relative experience of the West). To explain these observations, we construct a model in which the South (Mid-West) has a comparative advantage in producing unskilled-labor intensive agricultural goods. Thus, it starts with a disproportionate share of the unskilled labor force and lower per capita incomes. Over time, declining education/training costs induce an increasing proportion of the labor force to move out of the (unskilled) agricultural sector and into the (skilled) non-agricultural sector. The decline in the agricultural labor force leads to an increase in relative agricultural wages. Both effects benefit the South (Mid-West) disproportionately since it has more agricultural workers. The model successfully matches the quantitative features of the U.S. structural transformation and regional convergence, as well as several other stylized facts on U.S. economic growth in the last century. The model does not rely on frictions on factor mobility, since in our empirical work we find this channel to be less important than the compositional effects the model emphasizes.
A number of theoretical models of technology adoption have been proposed that emphasize technological switching, loss of expertise and subsequent technology-specific learning. These models imply that measured productivity may initially fall and then later rise after the adoption of a new technology. This paper investigates whether or not this implication is a feature of plant-level data from the Colombian manufacturing sector. We regress measures of productivity growth at the plant level on a plant-specific measure of technology adoption and its lagged values. We find that...
How much technological progress has there been in structures? An attempt is made to measure this using panel data on the age and rents for buildings. This data is interpreted through the eyes of a vintage capital model where buildings are replaced at some chosen periodicity. There appears to have been significant technological advance in structures that accounts for a major part of economic growth.
This paper presents a model in which a country's average propensity to save tends to rise endogenously over time. The paper uses a two-sector neoclassical framework to model the transition from agriculture to manufacturing which typically accompanies economic development. Key assumptions are that only the agricultural sector uses land and a simple version of Engel's law. When a country's income per capita is low, agricultural consumption is important; consequently, land is valuable and capital gains on it may account for most wealth accumulation, making the NIPA APS appear low. If exogenous technological progress raises incomes over time, Engel's law shifts demand to manufactured goods. Then land's importance in portfolios relative to reproducible capital diminishes and the measured average propensity to save can rise.