Can neoclassical theory account for the Great Depression in the United States--- both the downturn in output between 1929 and 1933 and the recovery between 1934 and 1939? Yes and no. Given the large real and monetary shocks to the U.S. economy during 1929--33, neoclassical theory does predict a long, deep downturn. However, theory predicts a much different recovery from this downturn than actually occurred. Given the period's sharp increases in total factor productivity and the money supply and the elimination of deflation and bank failures, theory predicts an extremely rapid recovery that returns output to trend around 1936. In sharp contrast, real output remained between 25 and 30 percent below trend through the late 1930s. We conclude that a new shock is needed to account for the Depression's weak recovery. A likely culprit is New Deal policies toward monopoly and the distribution of income. The views expressed herein are those of the authors and not necessarily those of...

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.

Staggered price-setting and staggered wage-setting are commonly viewed as similar mechanisms in generating persistent real effects of monetary shocks. In this paper, we distinguish the two mechanisms in a dynamic stochastic general equilibrium framework. We show that, although the dynamic price-setting and wage-setting equations are alike, a key parameter governing persistence is linked to the underlying preferences and technologies in different ways. With reasonable parameter values, the staggered price mechanism by itself is incapable of, while the staggered wage mechanism plays an important role in generating persistence.

Centre de recherche sur l’emploi et les fluctuations économiques (CREFÉ)

This paper recasts Temin's (1976) question of whether monetary forces caused the Great Depression in a recursive time series framework. We adopt Bayesian updating techniques for estimation and forecasting to spot structural breaks and monetary regime changes. Examining traditional and credit channels of transmission, we find very little predictive power of monetary policy for output in the downturn and after 1931. During the propagation phase of 1930-31, monetary policy forecasts output correctly at a one-month horizon but invariably predicts recovery at longer horizons. The impulse response functions exhibit remarkable structural instability and react strongly to monetary regime changes during the depression. The explanatory power of monetary policy as measured by the variance decompositions is generally low and reacts to the same regime changes. In line with the Lucas (1976) critique, this suggests that the money- income relationship was endogenous to policy regimes and not among the deep parameters of the U.S. economy. Experimenting with non-monetary alternatives, we find strong evidence for a downturn in investment, which predicts a major recession already in early 1929. Given the highly erratic statistical performance of monetary instruments and the strong showing of leading indicators on real activity, we remain skeptical with regard to a monetary interpretation of the Great Depression in the U.S.

2001 Midwest Macro Meeting, and the 2001 SED Annual Meeting for helpful comments. Phaneuf acknowledges financial support from SSHRC and FCAR. The usual disclaimer Empirical studies reveal that monetary policy shocks generate long-lasting effects on real GDP, countercyclical real wages before World War II and procyclical real wages afterwards. In this paper, we construct a dynamic general equilibrium model to explain the observed output persistence and the evolving nature of real wage cyclicality. The model features three important rigidities: staggered price-setting, staggered wage-setting, and an input-output structure. We show that, while no subset of the model with fewer ingredients can produce both the desired patterns of real wage dynamics and persistent movements in aggregate output, the model with all three features successfully accounts for these empirical regularities. In particular,

Building upon the work of Cover (1992), a sizeable literature has developed in which the asymmetry of money supply shocks has been empirically investigated. The bulk of this work has focused on post-Word War II data. Accordingly, we study this question with U.S. data from both the interwar period and a near 40-year pre-World War I period. We find strong evidence in favor of monetary shock asymmetry only for the latter stage of the Great Depression, and speculate that the appearance of this asymmetry was due to the rather unique institutional and financial circumstances that prevailed at the time

In Italy, as in many other countries, the years immediately after 1929 were characterized by a major slowdown in economic activity. We argue that the depth and duration of the crisis cannot be explained solely by productivity shocks. We present a model in which trade restrictions together with wage rigidities produce a significant slowdown in economic activity. The model is also consistent with evidence from sectoral disaggregated data. Our model predicts that trade restrictions can account for about one-half of the slowdown observed in the data while real wage rigidities can account for one-fourth of it.

www.elsevier.com/locate/jme Robustness and real consequences of nominal wage rigidity $

In 2004 all publications will carry a motif taken from the €100 banknote. This paper can be downloaded without charge from