A multi-sectoral approach to the U.S. Great Depression

By Pedro S. Amaral and James C. MacGee


We document sectoral differences in changes in output, hours worked, prices, and nominal wages in the United States during the Great Depression. We explore whether contractionary monetary shocks combined with different degrees of nominal wage frictions across sectors are consistent with both sectoral as well as aggregate facts. To do so, we construct a two-sector model where goods from each sector are used as intermediates to produce the sectoral goods that in turn produce final output. One sector is assumed to have flexible nominal wages, while nominal wages in the other sector are set using Taylor contracts. We calibrate the model to the U.S. economy in 1929, and then feed in monetary shocks estimated from the data. We find that while the model can qualitatively replicate the key sectoral facts, it can account for less than a third of the decline in aggregate output. This decline in output is roughly half as large as the one implied by a one-sector model. Alternatively, if wages are set using Calvo-type contracts, the decline in output is even smaller.

In recent years, aggregate models have brought interesting answers to light regarding the origin and continuation of the Great Depression, starting with the work of Cole and Ohanian (1999). Cole and Ohanian (2001) extend it to a two sector model with wage rigidities in one sector and show that this contributed little to the Great Depression. Bordo, Erceg and Evans (2000) use a one-sector model with Taylor contracts and find that it can explain a significant part of the Great Depression. Amaral and MacGee combine the two and find only a third of the decline can be explained by these wage rigidities. Is this the end of this debate?

2 Responses to A multi-sectoral approach to the U.S. Great Depression

  1. M.H. says:

    It seems that from all the debate about the Great Depression, the financial sector has nothing to do with it. So could people please stop comparing the current recession with the Great Depression?

  2. Lee Ohanian says:

    NBER WP 15258 (published in JET, Nov, 2009), also specifies a two-sector model, as in Pedro and Jim’s paper, but reaches a much different conclusion based on differences in the duration of the wage policies. Pedro and Jim look at temporary changes in real wages, which is similar to what Hal Cole and I did in our 2000 Macro Annual paper, while I consider steady state changes in the paper cited above.

    The steady state change in wages, which I argue follows from permanent changes in labor/unionization policies around that time, leads to much larger declines in employment and output.

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