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A multi-sectoral approach to the U.S. Great Depression

  • Pedro S. Amaral
  • James C. MacGee

We document sectoral differences in changes in output, hours worked, prices, and nominal wages in the United States during the Great Depression. We explore whether contractionary monetary shocks combined with different degrees of nominal wage frictions across sectors are consistent with both sectoral as well as aggregate facts. To do so, we construct a two-sector model where goods from each sector are used as intermediates to produce the sectoral goods that in turn produce final output. One sector is assumed to have flexible nominal wages, while nominal wages in the other sector are set using Taylor contracts. We calibrate the model to the U.S. economy in 1929, and then feed in monetary shocks estimated from the data. We find that while the model can qualitatively replicate the key sectoral facts, it can account for less than a third of the decline in aggregate output. This decline in output is roughly half as large as the one implied by a one-sector model. Alternatively, if wages are set using Calvo-type contracts, the decline in output is even smaller.

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Paper provided by Federal Reserve Bank of Cleveland in its series Working Paper with number 0911.

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Date of creation: 2009
Date of revision: 01 Aug 2012
Handle: RePEc:fip:fedcwp:0911
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  1. Huw Dixon & Engin Kara, 2005. "How to Compare Taylor and Calvo Contracts: a comment on Michael Kiley," CDMA Working Paper Series 200504, Centre for Dynamic Macroeconomic Analysis.
  2. Bordo, Michael D. & Evans, Charles L., 1995. "Labor productivity during the Great Depression," Economics Letters, Elsevier, vol. 47(1), pages 41-45, January.
  3. Robert J. Gordon, 1986. "The American Business Cycle: Continuity and Change," NBER Books, National Bureau of Economic Research, Inc, number gord86-1, July.
  4. Robert J. Gordon, 1986. "Front matter, The American Business Cycle. Continuity and Change," NBER Chapters, in: The American Business Cycle: Continuity and Change, pages -15 National Bureau of Economic Research, Inc.
  5. John W. Kendrick, 1961. "Productivity Trends in the United States," NBER Books, National Bureau of Economic Research, Inc, number kend61-1, July.
  6. Alston, Lee J. & Hatton, T. J., 1991. "The Earnings Gap Between Agricultural and Manufacturing Laborers, 1925–1941," The Journal of Economic History, Cambridge University Press, vol. 51(01), pages 83-99, March.
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