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Working Paper

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

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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.
Topics
Monetary policy
03.18.2016ISSN 2573-7953 WP 09-11R2Original Paper WP 09-11Revisions WP 09-11RDOI 10.26509/frbc-wp-200911r2
Keywords great depression, sectoral models, sticky wages
JEL Classification Codes E20, E30, E50

Working Papers of the Federal Reserve Bank of Cleveland are preliminary materials circulated to stimulate discussion and critical comment on research in progress. They may not have been subject to the formal editorial review accorded official Federal Reserve Bank of Cleveland publications. The views expressed in this paper are those of the authors and do not represent the views of the Federal Reserve Bank of Cleveland or the Federal Reserve System.

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. https://doi.org/10.26509/frbc-wp-200911r2