Money, Sticky Wages, and the Great Depression

55 Pages Posted: 28 Jan 1998 Last revised: 6 Oct 2010

See all articles by Michael D. Bordo

Michael D. Bordo

Rutgers University, New Brunswick - Department of Economics; National Bureau of Economic Research (NBER)

Christopher J. Erceg

Board of Governors of the Federal Reserve System

Charles L. Evans

Federal Reserve Bank of Chicago - Research Department

Multiple version iconThere are 2 versions of this paper

Date Written: June 1997

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.

Suggested Citation

Bordo, Michael D. and Erceg, Christopher J. and Evans, Charles L., Money, Sticky Wages, and the Great Depression (June 1997). NBER Working Paper No. w6071. Available at SSRN: https://ssrn.com/abstract=55158

Michael D. Bordo (Contact Author)

Rutgers University, New Brunswick - Department of Economics ( email )

New Brunswick, NJ
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
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Christopher J. Erceg

Board of Governors of the Federal Reserve System ( email )

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202-736-5638 (Fax)

Charles L. Evans

Federal Reserve Bank of Chicago - Research Department ( email )

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Chicago, IL 60604-1413
United States
312-322-5812 (Phone)
312-322-2357 (Fax)

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