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Money, sticky wages, and the Great Depression

Author Info

Listed author(s):
  • Michael D. Bordo
  • Christopher J. Erceg
  • Charles L. Evans

Abstract

This paper examines the ability of a simple stylized general equilibrium model that incorporates nominal wage rigidity to explain the magnitude and persistence of the Great Depression in the United States. The impulses to our analysis are money supply shocks. The Taylor contracts model is surprisingly successful in accounting for the behavior of major macroaggregates and real wages during the downturn phase of the Depression, i.e., from 1929:3 through mid-1933. Our analysis provides support for the hypothesis that a monetary contraction operating through a sticky wage channel played a significant role in accounting for the downturn, and also provides an interesting refinement to this explanation. In particular, both the absolute severity of the Depression's downturn and its relative severity compared to the 1920-21 recession are likely attributable to the price decline having a much larger unanticipated component during the Depression, as well as less flexible wage-setting practices during this latter period. Another finding casts doubt on explanations for the 1933-36 recovery that rely heavily on the substantial remonetization that began in 1933.

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Paper provided by Board of Governors of the Federal Reserve System (U.S.) in its series International Finance Discussion Papers with number 591.

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Date of creation: 1997
Handle: RePEc:fip:fedgif:591
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Keywords: Money ; Wages ; Depressions;

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Find related papers by JEL classification:
  • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
  • N12 - Economic History - - Macroeconomics and Monetary Economics; Industrial Structure; Growth; Fluctuations - - - U.S.; Canada: 1913-
  • N22 - Economic History - - Financial Markets and Institutions - - - U.S.; Canada: 1913-
  • E23 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Production
  • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity

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Blog mentions

As found by EconAcademics.org, the blog aggregator for Economics research:
  1. A multi-sectoral approach to the U.S. Great Depression
    by Christian Zimmermann in NEP-DGE blog on 2010-02-08 01:58:23
  2. Pourquoi le New Deal français a-t-il échoué ?
    by Martin Anota in D'un champ l'autre on 2015-03-23 22:23:46
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