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


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.

JEL Classification: E20, E30, E50.
Keywords: Great Depression, Sectoral Models, Sticky Wages.

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Suggested citation: Amaral, Pedro S., and James C. MacGee, 2016. “Re-examining the Role of Sticky Wages in the U.S. Great Contraction: A Multisectoral Approach,” Federal Reserve Bank of Cleveland, Working Paper no. 09-11R2.

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