Lee E. Ohanian

New Deal Policies and the Persistence of the Great Depression: A General Equilibrium Analysis.

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 the contribution to the persistence of the Depression of New Deal cartelization policies designed to limit competition and increase labor bargaining power. We develop a model of the bargaining process between labor and firms that occurred with these policies and embed that model within a multisector dynamic general equilibrium model. We find that New Deal cartelization policies are an important factor in accounting for the failure of the economy to recover back to trend.

THE CYCLICAL BEHAVIOR OF PRICES

Abstract The procyclical behavior of prices has been a staple of business cycle lore since the work of the early NBER business cycle researchers. This paper reexamines that empirical fact. The aggregate data do not support procyclical price movements as a stable feature of the business cycle. The only episode where it is a robust feature of the data is the period between the two world wars, particularly the period of the Great Depression.

Long-Term Changes in Labor Supply and Taxes: Evidence from OECD Countries, 1956-2004

We document large differences in trend changes in hours worked across OECD countries over the period 1956-2004. We then assess the extent to which these changes are consistent with the intratemporal first order condition from the neoclassical growth model. We find large and trending deviations from this condition, and that the model can account for virtually none of the changes in hours worked. We then extend the model to incorporate observed changes in taxes. Our findings suggest that taxes can account for much of the variation in hours worked both over time and across countries.

Dynamic Equilibrium Economies: A Framework for Comparing Models and Data

Many recent theoretical papers have come under attack for modeling prices as Geometric Brownian Motion. This process can diverge over time, implying that firms facing this price process can earn infinite profits. We explore the significance of this attack and contrast investment under Geometric Brownian Motion with investment assuming mean reversion. While analytically more complex, mean reversion in many cases is a more plausible assumption, allowing for supply responses to increasing prices. We show a mean reversion process rather than Geometric Brownian Motion and provide an explanation for this result.

Long-term changes in labor supply and taxes: Evidence from OECD countries, 1956-2004

We document large differences in trend changes in hours worked across OECD countries over the period 1956-2004. We then assess the extent to which these changes are consistent with the intratemporal first order condition from the neoclassical growth model. We find large and trending deviations from this condition, and that the model can account for virtually none of the changes in hours worked. We then extend the model to incorporate observed changes in taxes. Our findings suggest that taxes can account for much of the variation in hours worked both over time and across countries.

The spurious effects of unit roots on vector autoregressions: A Monte Carlo study

Abstract Recently, several prominent vector autoregression studies have analyzed non-stationary series directly, rather than difference or detrend the data to achieve stationarity. This paper develops a Monte Carlo experiment to investigate the sensitivity of VARs to unit root processes. In a VAR of money, real output, aggregate prices, and an interest rate, we find that the inclusion of an artificially generated random walk has surprising effects on the systems variance decomposition and block exogeneity tests. In particular, block exogeneity of the genuine variables of the VARs is rejected, on average, 21 percent of the time for a 5 percent level test. The experiments are replicated for a borderline stationary process and a white noise process. While the borderline stationary process has modest effects, the white noise process has no effects. These results suggest caution in interpreting Granger-causality tests and variance decompositions in VARs estimated with potentially integrated regressors.

What - or who - started the great depression?

Herbert Hoover. I develop a theory of labor market failure for the Depression based on Hoovers industrial labor program that provided industry with protection from unions in return for keeping nominal wages fixed. I find that the theory accounts for much of the depth of the Depression and for the asymmetry of the depression across sectors. The theory also can reconcile why deflation/low nominal spending apparently had such large real effects during the 1930s, but not during other periods of significant deflation.

The U.S. and U.K. Great Depressions Through the Lens of Neoclassical Growth Theory

Neoclassical growth theory is increasingly being used to study Great Depressions (see e.g., Mario J. Crucini and James Kahn, 1996; Cole and Ohanian, 1999, 2001a, b, 2002; Michael Bordo et al., 2000) (see also the January 2002 issue of the Review of Economic Dynamics). This paper extends our recent work that focuses on why the U.S. and U.K. Great Depressions lasted so long. One of the key messages from our work is that the standard neoclassical growth model fails to account for the long duration of these depressions. This paper extends our work by diagnosing the specific failures of the model. We do this by measuring the deviations in the models first-order conditions. We then use these deviations to identify particular factors that might account for these long durations. We find very large deviations in the models household labor efficiency condition in both countries, and in the firms labor efficiency condition in the United States. These deviations provide new support for our recent conclusions that distorting labor-market policies are key factors behind the long durations of both depressions (Cole and Ohanian, 2001a, b).

Postwar British Economic Growth and the Legacy of Keynes

The policies used by Britain to finance World War II represented a dramatic departure from the policies used to finance earlier wars and were very different from the policies used by the united states during the war. Following Keyness recommendations, Britain taxed capital income at a much higher rate than the United States during the war and for much of the postwar period. We analyze quantitatively the policies designed by Keneys using an endogenous growth model and the ncoclassical growth model. We also evaluate the implications of tax‐smoothing policies. We find that the welfare costs of Keyness policies were very high relative to a tax‐smoothing policy and argue that Britains poor macroeconomic performance in the early postwar period is a consequence of the high tax rates levied on capital income.

Unemployment, negative equity, and strategic default

Using new household level data, we quantitatively assess the roles that (i) job loss, (ii) negative equity, and (iii) wealth (including unsecured debt, liquid, and illiquid assets) play in default decisions. In sharp contrast to prior studies that proxy for individual unemployment status using regional unemployment rates, we find that individual unemployment is the strongest predictor of default. We find that individual unemployment increases the probability of default by 5-13 percentage points, ceteris paribus, compared to the sample average default rate of 3.9%. We also find that only 13.9% of defaulters have both negative equity and enough liquid or illiquid assets to make 1 month’s mortgage payment. This suggests that “ruthless,” or “strategic” default during the 2007-2009 recession is relatively rare, and suggests that policies designed to promote employment, such as payroll tax cuts, are most likely to stem defaults in the long run rather than policies that temporarily modify mortgages.