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

  • Amaral, Pedro S.

    (Federal Reserve Bank of Cleveland)

  • MacGee, James

    (Western University)

We quantify the role of contractionary monetary shocks and nominal wage rigidities in the U.S. Great Contraction. In contrast to conventional wisdom, we find that the average economy-wide real wage varied little over 1929–33, although real wages rose significantly in some industries. Using a two-sector model with intermediates and nominal wage rigidities in one sector, we find that contractionary monetary shocks can account for only a quarter of the fall in GDP, and as little as a fifth at the trough. Intermediate linkages play a key role, as the output decline in our benchmark is roughly half as large as in a two-sector model without intermediates.

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

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Length: 49 pages
Date of creation: 2009
Date of revision: 01 Aug 2012
Handle: RePEc:fip:fedcwp:0911
Note: A multi-sectoral approach to the U.S. Great Depression (2009)
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