New Deal Policies and the Persistence of the Great Depression: A General Equilibrium Analysis
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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- V. V. Chari & Lawrence J. Christiano & Patrick J. Kehoe, 1993.
"Optimal fiscal policy in a business cycle model,"
160, Federal Reserve Bank of Minneapolis.
- 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.
- V. V. Chari & Patrick J. Kehoe & Ellen R. McGrattan, 1996.
"Sticky Price Models of the Business Cycle: Can the Contract Multiplier Solve the Persistence Problem?,"
NBER Working Papers
5809, National Bureau of Economic Research, Inc.
- 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.
- V. V. Chari & Patrick J. Kehoe & Ellen R. McGrattan, 1998. "Sticky price models of the business cycle: can the contract multiplier solve the persistence problem?," Staff Report 217, Federal Reserve Bank of Minneapolis.
- 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..
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