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

Abstract

This book collects essays, most of which were published earlier, into an advertisement for real business cycle (RBC) analysis. Half of the essays discuss the Great Depression; half discuss events of the 1980s and 1990s. They all use the general equilibrium model of economic growth to analyze short-run fluctuations in the rate of economic growth of various countries. I find that the use of closed economy models without frictions is not useful for the analysis of short-run variations in the rate of economic growth. Almost all of these essays end by claiming that variations in the rate of GDP growth were due to changes in the rate of total factor productivity (TFP) growth. They do not provide any explanation for fluctuations in the rate of TFP growth, leaving the reader no closer to understanding these periods of depression and slow growth. I discuss in turn the essays on the Great Depression, the essays on more recent fluctuations, and the definition of “great depressions” used in this volume.

Technological change and the roaring twenties: A neoclassical perspective

“…Temin (2008) questions the ability of the frictionless RBC model to explain the Great Depression. Here we do not claim that our theory can explain all ‡uctuations.…”

Technology Shocks and the Great Depression

“…This article's results suggest the importance of the purified TFP measure in studying the role of technology change in business cycles. Temin (2008, 2009) criticizes Cole and Ohanian (1999) and Kehoe and Prescott's (2008) exercises for providing little guidance in answering why productivity fell so sharply. Such debate loses importance, since this article's new measure, on average, suggests almost no technology regress during the Great Depression.…”

Using the General Equilibrium Growth Model to Study Great Depressions: A Rejoinder to Kehoe and Prescott

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AbstractThe reply by Kehoe and Prescott restates their position but does not answer the criticism made in my review of their book (Temin 2008). I argued that the general equilibrium model of economic growth to study income fluctuations does not lead to a useful research program; the use of closed-economy models to understand the world problems of the 1930s and the Latin-American problems of the 1980s is not helpful; and the authors using Kehoe and Prescott's recommended approach do not use data with the care standard in other branches of economics.

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