The blogosphere is catching up

I see the blogosphere has caught up to the early nineties in the macroeconomics debate. As Larry Summers argued — in 1988! — there are problems, like the Great Depression, with real business cycle theory. How can supply shocks explain such hugemongous declines in GDP?

Cole and Ohanian subsequently took up that challenge — in 1999! — finding that while real shocks explain about half of the contraction, recovery from the Great Depression was much slower than predicted by RBC. They claimed this was because New Deal policies were contractionary. This lead to responses from folks like Eggertsson.

The neo-classical view of the Great Depression is captured in a new book edited by Kehoe and Prescott. There are no macroeconomists, except perhaps Prescott, who believe real shocks are the only important shocks to the economy. Its important to point out, though, that no matter how kooky Prescott is, real shocks explain well over half of fluctuations.

3 Responses to “The blogosphere is catching up”

  • Gabriel says:

    Am I the only one that thinks that these are the wrong questions to ask? The shocks decomposition of output volatility is always contingent on some structural model so the right questions should be about models. A few things that come to mind:

    a) The (sub?)optimality of price setting behavior;
    b) The right microfoundations of money demand;
    c) The right microfoundations of labor demand;
    d) Are we in a state of sin when we model policy by loss functions or “tractable” rules?

    Disagreement about those issues are what drives the different estimates of, for example, the importance of a shock you tack onto a nominal interest rate rule, or whatever.

  • Gabriel says:

    Uuu… nevermind, now I see that you mean something else.

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