Between 1929 and1933, employment fell about 25 percent and output fell about 30 percent in the United States.By 1939, employment and output remained well below their 1929 levels.Why did employment and output fall so much in the early 1930s?Why did they remain so low a decade later?In this article, we address these two questions by evaluating macroeconomic performance in the United States from 1929 to 1939.This period consists of a decline in economic activity (1929-33) followed by a recovery .Our definition of the Great Depression as a 10-year event differs from the standard definition of the Great Depression, which is the 1929-33 decline.We define the Depression this way because employment and output remained well below their 1929 levels in 1939.We examine the Depression from the perspective of neoclassical growth theory.By neoclassical growth theory; we mean the optimal growth model in Cass 1965 and Koopmans 1965 augmented with various shocks that cause employment and output to deviate from their deterministic steady-state paths as in Kydland and Prescott 1982. 1 We use neoclassical growth theory to study macroeconomic performance during the 1930s the way other economists have used the theory to study postwar business cycles.We first identify a set of shocks considered important in postwar economic declines: technology shocks, fiscal policy shocks, trade shocks, and monetary shocks.We then ask whether those shocks, within the neoclassical frame-work, can account for the decline and the recovery in the 1930s.This method allows us to understand which data from the 1930s are consistent with neoclassical theory and, especially, which observations are puzzling from the neoclassical perspective.In our analysis, we treat the 1929-33 decline as a long and severe recession.2 But the neoclassical approach to analyzing business cycles is not just to assess declines in economic activity, but to assess recoveries as well.When we compare the decline and recovery during the Depression to a typical postwar business cycle, we see striking differ-*The authors acknowledge the tremendous contribution Edward Prescott made to this project in the many hours he spent talking with them about the Depression and in the input and guidance he generously provided.
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