Working Paper: NBER ID: w22122
Authors: Gary D. Hansen; Lee E. Ohanian
Abstract: This chapter develops a toolkit of neoclassical macroeconomic models, and applies these models to the U.S. economy from 1929 through 2014. We first filter macroeconomic time series into business cycle and long-run components, and show that the long-run component is typically much larger than the business cycle component. We argue that this empirical feature is naturally addressed within neoclassical models with long-run changes in technologies and government policies. We construct two classes of models that we compare to raw data, and also to the filtered data: simple neoclassical models, which feature standard preferences and technologies, rational expectations, and a unique, Pareto-optimal equilibrium, and extended neoclassical models, which build in government policies and market imperfections. We focus on models with multiple sources of technological change, and models with distortions arising from regulatory, labor, and fiscal policies. The models account for much of the relatively stable postwar U.S. economy, and also for the Great Depression and World War II. The models presented in this chapter can be extended and applied more broadly to other settings. We close by identifying several avenues for future research in neoclassical macroeconomics.
Keywords: neoclassical models; macroeconomics; economic growth; fluctuations; U.S. economy
JEL Codes: E13; E2; E6
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Changes in technology (O33) | Fluctuations in economic activity (E32) |
| Government policies (H59) | Fluctuations in economic activity (E32) |
| Low-frequency movements in aggregate variables (E19) | Fluctuations in economic activity (E32) |
| Neoclassical models (E13) | Significant movements in U.S. aggregate economic activity (E32) |
| Great Depression (G01) | Fluctuations in economic activity (E32) |
| World War II (N44) | Fluctuations in economic activity (E32) |
| Great Recession (G01) | Persistent decline in economic activity (E32) |