The Great Depression in the United States from a neoclassical perspective

Cole, Harold L.; Ohanian, Lee E.

Journal Article

The Great Depression in the United States from a neoclassical perspective

Abstract: Can neoclassical theory account for the Great Depression in the United States?both the downturn in output between 1929 and 1933 and the recovery between 1934 and 1939? Yes and no. Given the large real and monetary shocks to the U.S. economy during 1929?33, neoclassical theory does predict a long, deep downturn. However, theory predicts a much different recovery from this downturn than actually occurred. Given the period?s sharp increases in total factor productivity and the money supply and the elimination of deflation and bank failures, theory predicts an extremely rapid recovery that returns output to trend around 1936. In sharp contrast, real output remained between 25 and 30 percent below trend through the late 1930s. We conclude that a new shock is needed to account for the Depression?s weak recovery. A likely culprit is New Deal policies toward monopoly and the distribution of income.

Keywords: Depressions;