ABSTRACT
This chapter examines the Depression from the perspective of neoclassical growth theory. It identifies a set of shocks considered important in postwar economic declines: technology shocks, fiscal policy shocks, trade shocks, and monetary shocks. Neoclassical theory and the data have implications for the plausibility of different sources of real shocks in accounting for the Depression. Many countries suffered economic declines during the 1930s; however, there are two important distinctions between economic activity in the United States and other countries during the 1930s. The chapter considers fiscal policy shocks—changes in government purchases or tax rates. Monetary shocks—unexpected changes in the stock of money—are considered an alternative to real shocks for understanding business cycles, and many economists think monetary shocks were a key factor in the 1929–33 decline. Neoclassical theory indicates that the Depression—particularly the recovery between 1934 and 1939—is a puzzle.
