Money, Sticky Wages, and the Great Depression
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- Reynard Young
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1 Money, Sticky Wages, and the Great Depression American Economic Review, 2000 Michael D. Bordo 1 Christopher J. Erceg 2 Charles L. Evans 3 1. Rutgers University, Department of Economics 2. Federal Reserve Bank of Washington D.C. 3. Federal Reserve Bank of Chicago Katie Lee and Jake Hochard April 12th, 2012
2 Introduction Motivation Great Depression and sticky wages
3 Introduction Motivation Great Depression and sticky wages Effect of Monetary Policy
4 Introduction Background Banking Crisis
5 Introduction Background Banking Crisis Federal Reserve Credit Supply
6 Introduction Background Banking Crisis Federal Reserve Credit Supply Remonetization
7 Introduction Background Banking Crisis Federal Reserve Credit Supply Remonetization National Industrial Recovery Act (NIRA)
8 Model Model Overview New-Keynesian Model
9 Model Model Overview New-Keynesian Model Money
10 Model Model Overview New-Keynesian Model Money Foundations in Microeconomics
11 Model Model Overview New-Keynesian Model Money Foundations in Microeconomics Three Sectors
12 Model Model Overview New-Keynesian Model Money Foundations in Microeconomics Three Sectors Households maximize utility
13 Model Model Overview New-Keynesian Model Money Foundations in Microeconomics Three Sectors Households maximize utility Firms maximize profit
14 Model Households Maximize Utility ( ) Max U = E 0 β t U C t, Mt C t,m t,b t,k t+1 P t t=0 β Discount Factor C Real Consumption M End-of-period nominal cash balances P Price level
15 Model Households Maximize Utility ( ) Max U = E 0 β t U C t, Mt C t,m t,b t,k t+1 P t Subject to t=0 Income {}}{ B t = B t 1+( R t 1B t 1 + W tl t + J tk t + π t + X t) Expenditures {}}{ (P tc t + P ti t + M t M t 1) K t+1 = (1 δ)k t + I t B Nominal bond holdings R Nominal interest rate L Total hours worked J Nominal rental price of capital π Nominal firm profits X Lump sum cash transfers from government
16 Model Firms Maximize Profit - No adjustment costs K = Capital Max π = K,L E0 t=0 ψ t[p tk θ t L 1 θ t W tl t J tk t] L = Labor W = Wage rate J = Capital rental rate ψ = Stochastic discount factor
17 Model Firms Maximize Profit - Adjustment costs K = Capital Max π = K,L E0 ψ t[p tkt θ t=0 ( L t ql 2 W tl t J tk t] (L t L t 1) 2 L t 1 ) 1 θ L = Labor W = Wage rate J = Capital rental rate ψ = Stochastic discount factor q L = Adjustment costs
18 Model Taylor wage contracts x t = Contract wage ln(x t) = φ 0ln(W t) + γ(l t L) φ 1ln(W t+1) + γ(l t+1 L) +E t +φ 2ln(W t+2) + γ(l t+2 L) +φ 3ln(W t+3) + γ(l t+3 L) W t = Average wage of all cohorts L t = Labor force L t = Natural rate of employment φ = Degree of forward looking behavior γ = Speed of wage adjustments
19 Model Taylor wage contracts x t = Contract wage ln(x t) = φ 0ln(W t) + γ(l t L) φ 1ln(W t+1) + γ(l t+1 L) +E t +φ 2ln(W t+2) + γ(l t+2 L) +φ 3ln(W t+3) + γ(l t+3 L) 4 Cohorts 4 Quarterly adjustments W t = Average wage of all cohorts L t = Labor force L t = Natural rate of employment φ = Degree of forward looking behavior γ = Speed of wage adjustments
20 Model Evolution of money stock Source of monetary supply shocks
21 Model Evolution of money stock Source of monetary supply shocks Exogenous
22 Model Evolution of money stock Source of monetary supply shocks Exogenous Determined by an AR(1), iid N(0, σ 2 g) process
23 Model Evolution of money stock Source of monetary supply shocks Exogenous Determined by an AR(1), iid N(0, σ 2 g) process g t+1 = g 0 + ρg t + ɛ t+1 g t = ln(m t ) ln(m t 1 )
24 Calibration and Estimation Key parameters
25 Calibration and Estimation Key parameters ρ = Monetary shocks Estimated from data
26 Calibration and Estimation Key parameters ρ = Monetary shocks Estimated from data q L = Adjustment costs Chosen (q L = 0.7)
27 Calibration and Estimation Key parameters ρ = Monetary shocks Estimated from data q L = Adjustment costs Chosen (q L = 0.7) γ = Wage contract sensitivity Backed out (chosen to minimize variance between model s simulation and data)
28 IRFs Monetary policy shock Figure: Model prediction with sticky wages
29 Simulation Money Supply and Price Level
30 Simulation Price level and Real wages
31 Simulation Real wages and Labor hours
32 Simulation Labor hours and Output
33 Simulation Output and Consumption
34 Simulation Big Picture
35 Simulation Big Picture
36 Conclusion Big Picture Neo-Keynesian model
37 Conclusion Big Picture Neo-Keynesian model Monetary policy
38 Conclusion Big Picture Neo-Keynesian model Monetary policy Test sticky wages in context of Great Depression
39 Conclusion Big Picture Neo-Keynesian model Monetary policy Test sticky wages in context of Great Depression Performance
40 Conclusion Big Picture Neo-Keynesian model Monetary policy Test sticky wages in context of Great Depression Performance Gold Standard, NIRA
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