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

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  • Harold L. Cole
  • Lee E. Ohanian

Abstract

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 of New Deal cartelization policies designed to limit competition and increase labor bargaining power to the persistence of the Depression. We develop a model of the bargaining process between labor and firms that occurred with these policies, and embed that model within a multi-sector dynamic general equilibrium model. We find that New Deal cartelization policies are an important factor in accounting for the post-1933 Depression. We also find that the key depressing element of New Deal policies was not collusion per se, but rather the link between paying high wages and collusion.

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Bibliographic Info

Article provided by University of Chicago Press in its journal Journal of Political Economy.

Volume (Year): 112 (2004)
Issue (Month): 4 (August)
Pages: 779-816

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Handle: RePEc:ucp:jpolec:v:112:y:2004:i:4:p:779-816

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References

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  1. Chari, V V & Christiano, Lawrence J & Kehoe, Patrick J, 1994. "Optimal Fiscal Policy in a Business Cycle Model," Journal of Political Economy, University of Chicago Press, vol. 102(4), pages 617-52, August.
  2. V. V. Chari & Patrick J. Kehoe & Ellen R. McGrattan, 2000. "Sticky Price Models of the Business Cycle: Can the Contract Multiplier Solve the Persistence Problem?," Econometrica, Econometric Society, vol. 68(5), pages 1151-1180, September.
  3. Lucas, Robert E, Jr & Rapping, Leonard A, 1972. "Unemployment in the Great Depression: Is There a Full Explanation?," Journal of Political Economy, University of Chicago Press, vol. 80(1), pages 186-91, Jan.-Feb..
  4. Harold L. Cole & Lee E. Ohanian, 1999. "The Great Depression in the United States from a neoclassical perspective," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Win, pages 2-24.
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  1. 2008=1929?
    by Economic Logician in Economic Logic on 2008-03-24 11:15:00
  2. Impressions about depressions
    by Economic Logician in Economic Logic on 2008-01-08 09:14:00
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