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

Amaral, Pedro S.; MacGee, James

Working Paper

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

Abstract: 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.

Keywords: Depressions; Wages; Prices;

JEL Classification: E20; E30; E50;