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Re-Examining the Role of Sticky Wages in the U.S. Great Contraction: A Multi-sector Approach

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Abstract

We quantify the role of contractionary monetary shocks and wage rigidities in the U.S. Great Contraction. While the average economy-wide real wage varied little over 1929-33, real wages rose significantly in some industries. We calibrate a two-sector model with intermediates to the 1929 U.S. economy where wages in one sector adjust slowly. We find that nominal wage rigidities can account for less than a fifth of the fall in GDP over 1929-33. Intermediate linkages play a key role, as the output decline in our benchmark is roughly half as large as in our two-sector model without intermediates.

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Paper provided by University of Western Ontario, Economic Policy Research Institute in its series University of Western Ontario, Economic Policy Research Institute Working Papers with number 20125.

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Date of creation: 2012
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Handle: RePEc:uwo:epuwoc:20125

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Postal: Economic Policy Research Institute, Social Science Centre, University of Western Ontario, London, Ontario, Canada N6A 5C2
Phone: 519-661-2111 Ext.85244
Web page: http://economics.uwo.ca/research/research_papers/epri_workingpapers.html

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Keywords: Great Depression; Sectoral Models; Sticky Wages;

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  1. Timothy Kehoe & Edward Prescott, 2002. "Data Appendix to Great Depressions of the Twentieth Century," Technical Appendices kehoe02, Review of Economic Dynamics.
  2. Timothy J. Kehoe & Edward C. Prescott (), 2007. "Great depressions of the twentieth century," Monograph, Federal Reserve Bank of Minneapolis, Federal Reserve Bank of Minneapolis, number 2007gdott.
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  8. Richard Rogerson & Akos Valentinyi & Berthold Herrendorf, 2007. "Growth and Structural Transformation," 2007 Meeting Papers, Society for Economic Dynamics 757, Society for Economic Dynamics.
  9. Robert J. Gordon, 1986. "The American Business Cycle: Continuity and Change," NBER Books, National Bureau of Economic Research, Inc, number gord86-1.
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  12. John W. Kendrick, 1961. "Productivity Trends in the United States," NBER Books, National Bureau of Economic Research, Inc, number kend61-1.
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