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 fi nd that the average economy-wide real wage varied little over 1929-33, although real wages rose signifi cantly in some industries. Using a two-sector model with intermediates and nominal wage rigidities in one sector, we fi nd that contractionary monetary shocks can account for only a quarter of the fall in GDP, and as little as a fi fth 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 Classication: E20, E30, E50.