Ireland's great depression

We argue that Ireland experienced a great depression in the 1980s comparable in severity to the better known and more studied depression episodes of the interwar period. Using the business cycle accounting framework of Chari, Kehoe and McGrattan (2005), we examine the factors that lead to the depression and the subsequent recovery in the 1990s. We calculate efficiency, labor, investment and government wedges, and evaluate the contribution of each to the downturn and subsequent recovery. We find that the efficiency wedge on its own can account for a significant portion of the downturn, but predicts a stronger recovery in output. The labor wedge also helps account for what happened during the depression episode. We also find that the investment wedge played no role in the depression.

Accounting for the Great Depression

Economists have offered many theories for the U.S. Great Depression, but no consensus has formed on the main forces behind it. Here we describe and demonstrate a simple methodology for determining which theories are the most promising. We show that a large class of models, including models with various frictions, are equivalent to a prototype growth model with time-varying efficiency, labor, and investment wedges that, at least on face value, look like time-varying productivity, labor taxes, and investment taxes. We use U.S. data to measure these wedges, feed them back into the prototype growth model, and assess the fraction of the fluctuations in 1929?39 that they account for. We find that the efficiency and labor wedges account for essentially all of the decline and subsequent recovery. Investment wedges play, at best, a minor role. This article originally appeared in the American Economic Review. (c) American Economic Association. ; RELATED PAPER: Staff Report 328 Business Cycle AccountingDepressions

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

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.Great Depression, New Classical Marcroeconomics, Real Business Cycle Theory, Equilibrium, Unemployment

The Great Recession and the Great Depression: Reflections and Lessons

The Great Recession that started in 2008 has drawn constant comparisons with the Great Depression that unfolded in 1929. This paper documents how the response of policy makers in the current episode has been markedly different from the one observed in the 1920s and 1930s and to what extent this different behavior has followed the lessons from the historical analysis of the Great Depression. The historical account is also used to discuss probable changes to the world’s economic landscape regarding both trade and financial globalization.

Opinion : Why the Great Depression matters

Perhaps the most important lesson to take from the Great Depression is that policymakers should follow the Hippocratic Oath: First, do no harm.Economic history

Elasticity of factor substitution and the rise in labor's share of income during the Great Depression

The sudden rise in labor's share of income during the U.S. Great Depression of 1929-1933 is examined. To explain this phenomenon, the deflation-based model of the Great Depression of Bordo et al. (2000) [Bordo, M.D.; Erceg, C.J.; Evans, C.L. "Money, Sticky Wages, and the Great Depression." American Economic Review 90:5, 1447-63.] is extended to the case of a Constant Elasticity of factor Substitution (CES) production function. It is shown that considering the low elasticity of factor substitution allows the model to explain the rise in labor's share of income, improves the model's predictions on other macroeconomic variables, and renders the issue of productivity during the Great Depression less puzzling.

Did the Great Depression affect Educational Attainment in the US?

The Great Depression is a prime example of a macroeconomic crisis that produced adverse economic and social effects in all spheres of life. The theoretical arguments about the real effects of the Great Depression on education vary. The first is that of economic hardships, which might force individuals eligible to go to school to work for their sustenance. The second argument is that high unemployment would reduce the opportunity cost of going to school, making going to school the best other viable alternative. Following these theoretical notions, this paper explores the impact of the Great Depression on education, on race (whites and blacks) and gender (males and females), during the period from 1930 to 1940. Furthermore, this paper examines the effects of state employment indices on the average education (at the mean). The results (using individual census data from 1960) show some evidence that the Great Depression affected education of whites born between 1911 and 1915. However, the results show no evidence that the variation in state employment indices affected the decision of schooling on the average (mean), but it affected the education of white males at the top of the distribution (90% percentile).Great Depression, education, employment indices

Not guilty? : agriculture in the 1920s and the Great Depression

Agricultural distress in the 1920s is routinely quoted among the causes of the Great Depression. This paper challenges the conventional wisdom. World agriculture was not plagued by overproduction and falling terms of trade. The indebtedness of American farmers, a legacy of the boom years 1919-1921, did jeopardize the rural banks, but the relation between their crises, the banking panic of 1930 and the Great Depression is tenuous at bes

Money, sticky wages, and the Great Depression

This paper examines the ability of a simple stylized general equilibrium model that incorporates nominal wage rigidity to explain the magnitude and persistence of the Great Depression in the United States. The impulses to our analysis are money supply shocks. The Taylor contracts model is surprisingly successful in accounting for the behavior of major macroaggregates and real wages during the downturn phase of the Depression, i.e., from 1929:3 through mid-1933. Our analysis provides support for the hypothesis that a monetary contraction operating through a sticky wage channel played a significant role in accounting for the downturn, and also provides an interesting refinement to this explanation. In particular, both the absolute severity of the Depression's downturn and its relative severity compared to the 1920-21 recession are likely attributable to the price decline having a much larger unanticipated component during the Depression, as well as less flexible wage-setting practices during this latter period. Another finding casts doubt on explanations for the 1933-36 recovery that rely heavily on the substantial remonetization that began in 1933.Money supply ; Wages ; Depressions