______________________________________________________________________________ Americans now work 50 percent more than do the Germans, French, and Italians. This was not the case in the early 1970s when the Western Europeans worked more than Americans. In this paper, I examine the role of taxes in accounting for the differences in labor supply across time and across countries, in particular, the effective marginal tax rate on labor income. The population of countries considered is that of the G-7 countries, which are major advanced industrial countries. The surprising finding is that this marginal tax rate accounts for the predominance of the differences at points in time and the large change in relative labor supply over time with the exception of the Italian labor supply in the early 1970s.

There are two striking aspects of the recovery from the Great Depression in the United States: the recovery was very weak and real wages in several sectors rose significantly above trend. These data contrast sharply with neoclassical theory, which predicts a strong recovery with low real wages. We evaluate the contribution of New Deal cartelization policies designed to limit competition and increase labor bargaining power to the persistence of the Depression. We develop a model of the bargaining process between labor and firms that occurred with these policies, and embed that model within a multi-sector dynamic general equilibrium model. We find that New Deal cartelization policies are an important factor in accounting for the post-1933 Depression. We also find that the key depressing element of New Deal policies was not collusion per se, but rather the link between paying high wages and collusion. � Both, U.C.L.A. and Federal Reserve Bank of Minneapolis. We thank Andrew Atkeson, Tom Holmes, Narayana Kocherlakota, Tom Sargent, Nancy Stokey, seminar participants, and in particular, Ed Prescott for comments. Ohanian thanks the Sloan Foundation and the National Science Foundation for support. The views expressed herein are those of the authors and not necessarily those of the Federal Reserve Bank of Minneapolis or the Federal Reserve System. 1.

We propose a simple method for guiding researchers in developing quantitative models of economic fluctuations. We show that a large class of models, including models with various frictions, are equivalent to a prototype growth model with time varying wedges that, at least at face value, look like time-varying productivity, labor taxes, and capital income taxes. We label the time varying wedges efficiency wedges, labor wedges, and investment wedges. We use data to measure them and then feed the measured back into the prototype growth model. We assess the fraction of fluctuations in output, employment and investment accounted for by these wedges during the Great Depression and the business cycle of the early 1980s. For the Great Depression we find that the efficiency and labor wedges in combination account for essentially all of the fluctuations and investment wedges play no role. For the business cycle of the early 1980s we find that the efficiency wedge plays a more important role and the labor and investment wedges play minor roles. We show that our results are not sensitive to alternative measures of capital utilization.

and the Federal Reserve Bank of Minneapolis for helpful discussions and comments. In particular, I thank Tim Kehoe and Ellen McGrattan for their help. I also thank Martin Weale and Franck Portier for providing some British and French tax information used in this lecture. Thanks also go to Sami Alpanda and James MacGee for research assistance and helpful discussions. This lecture draws heavily on collaborative research with Fumio Hayashi. I thank the Economic and Social Research Institute, Cabinet Office, Government of Japan and the U.S. National

This paper quantitatively evaluates the hypothesis that deflation can account for much of the Great Depression (1929-33). We examine two popular explanations of the Depression: (1) The “high wage ” story, according to which deflation, combined with imperfectly flexible wages, raised real wages and reduced employment and output. (2) The “bank failure ” story, accordingtowhichdeflationary money shocks contributed to bank failures and to a reduction in the efficiency of financial intermediation, which in turn reduced lending and output. We evaluate these stories using general equilibrium business cycle models, and find that wage shocks and banking shocks account for a small fraction of the Great Depression. We also find that some other predictions of the theories are at variance with the data.

Bank of Minneapolis and University of Minnesota. We thank the NSF for financial support. The views expressed herein are those of the authors and not necessarily those of the Federal Reserve Bank of Minneapolis or the Federal Reserve System. The Great Depression is not yet well understood. Economists have offered many theories for both the massive decline and the slow recovery of output during 1929—39, but no consensus has formed on the main forces behind this major economic event. Here we describe and demonstrate a simple methodology for determining which types of theories are the most promising. Several prominent theories blame the Great Depression on frictions in labor and capital markets. The sticky wage theory is that wage stickiness together with a monetary contraction produces a downturn in output. (See Michael Bordo, Christopher Erceg, and Charles Evans 2001.) The cartelization theory is that an increase in cartelization and unionization leads to a slow recovery. (See Harold Cole and Lee Ohanian 2001.) The investment friction theory is that monetary contractions increase frictions in capital markets that produce investment-driven downturns in output.

Between 1913 and 1929, real GDP per person in the UK fell 1 percent, while this same measure of economic activity rose about 25 percent in the rest of the world. Why was Britain so depressed in a decade of strong economic activity around the world? This paper argues that the standard explanations of contractionary monetary shocks and an overvalued nominal exchange rate are not the prime suspects for killing the British economy. Rather, we argue that large, negative sectoral shocks, coupled with generous unemployment benefits and housing subsidies, are the primary causes of this long and deep depression. We thank seminar participants at UCLA and the Great Depressions of the 20th Century Conference, and Tim Kehoe and Richard Rogerson for helpful comments. We are particularly indebted to Ed Prescott and our discussant, Tom Sargent. We also thank Chris Edmonds and Ron Leung for their research assistance. Ohanian thanks the Sloan Foundation and the NSF for research support. The views expressed herein are those of the authors and not necessarily those of the Federal Reserve Bank of Minneapolis or the Federal Reserve System

In this paper I review the contribution of real business cycles models to our understanding of economic fluctuations, and discuss open issues in business cycle research.

A desirable financial-crisis model should give policy suggestions for handling a downward spiral as well as an explanation for the causes of a financial crisis. Koo is an economist and Kiser is an associate economist in the Research Department of the Federal Reserve Bank of Dallas. Financial turbulence and distress characterized much of the 1990s. The decade began with Europe’s exchange-rate crisis of 1992–93 and by 2000 had witnessed two more major financial crises. The unexpected financial meltdown of Mexico, known as the Tequila Crisis, began with the peso devaluation in December 1994. This crisis quickly spread to other Latin American countries. The Asian crisis started with Thailand devaluing its currency in July 1997, reached neighboring countries (Malaysia, Indonesia, Philippines, and South Korea) by the end of the year, then spread to Russia in 1998 and to Brazil in 1999. Even though the causes of the crises varied in each country, the Tequila Crisis and the Asian crisis have a commonality defined by Kaminsky and Reinhart (1999) as a twin crisis —a case when currency and banking woes are linked together. A twin crisis is far more severe than when currency and banking problems occur separately. These unexpected and severe crises prompted much research that focused mainly on their sources. 1 By identifying the sources, researchers hoped to identify long-term solutions as well as to predict financial meltdowns. 2 In the endeavor to find the root causes of the Asian crisis, two hypotheses surfaced: the weakfundamentals view and the financial-panic view, which are not necessarily mutually exclusive. 3 Each hypothesis has policy implications for the management as well as the prevention of future crises. 4 According to the weak-fundamentals view, a country’s weakness in macroeconomic or financial fundamentals, or both, causes the sudden reversal of capital flows, and major structural reforms and commitment to continue those reforms are necessary to solve the problems. 5 The weak-fundamentals view predicts a slow recovery, because it takes time to recognize bank and corporate losses and to allocate the losses among creditors (Dooley 1999). The financial-panic view considers a crisis as no more than the reaction of nervous markets

We study the behavior of output, employment, consumption, and investment in Germany during the Great Depression of 1928-37. In this time period, real wages were countercyclical, and productivity and fiscal policy were procyclical. We use the neoclassical growth model to investigate how much these factors contribute to the Depression. We find that real wages, which were significantly above their market clearing levels, were the most important factor for the economic decline in the Depression. Changes in productivity and fiscal policy were also important for the decline and recovery. Even though our analysis is limited to a small number of factors, the model accounts surprisingly well for the Depression in Germany. Journal of Economic Literature Classification Numbers: E13, E32, E62, N14, O47 Keywords: Great Depression, Germany, growth model, real wages, productivity, fiscal policy # We would like to thank Ed Prescott for encouraging this line of research and for many helpful comments. Thanks also to Albrecht Ritschl for various discussions and making his data available to us. We thank participants at the "Great Depressions of the 20th Century" conference, and seminar participants at the University of Rochester, the University of Pennsylvania, and Humboldt Universitat, Berlin, for helpful comments. The views expressed in this paper are those of the authors and do not necessarily represent those of the Federal Reserve Banks of Chicago and Richmond, or the Federal Reserve System. + Federal Reserve Bank of Chicago (jfisher@frbchi.org). # Federal Reserve Bank of Richmond (andreas.hornstein@rich.frb.org). 1.