Luca Pensieroso

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

Is the Great Depression amenable to real business cycle theory? In the 1970s and 1980s Lucas and Prescott took an abstentionist stance. They maintained 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, 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 constructed 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 work of economic historians.

An analysis of Turkey's accession to the European Union

We build a twocountry dynamic general equilibrium model to study whether European citizens would benefit from the eventual accession of Turkey to the European Union (EU). The results of the simulations show that Turkeys accession is welfare enhancing for Europeans, provided that Turkish total factor productivity (TFP) increases sufficiently after enlargement. In the benchmark model with no capital mobility, the Europeans are better off if the Turkish TFP increase bridges more than 21% of the initial TFP gap between Turkey and the EU. This figure increases to 33% when capital mobility is introduced.