The Role of Real Wages, Productivity, and Fiscal Policy in Germany’s Great Depression 1928.pdf

The Role of Real Wages, Productivity, and Fiscal Policy in Germany’s Great Depression 1928-1937 o By: Jonas D.M. Fisher and Andreas g a Hornstein c i h C f o k n a B e v r e s e R l a r e d e F WP 2001-07 The Role of Real Wages, Productivity, and Fiscal Policy in Germany’s Great Depression 1928-37∗ Jonas D.M. Fisher† Andreas Hornstein‡ First Draft: October 16, 2000 This Draft: August 29, 2001 Abstract 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 neoclas- sical 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 sur- prisingly 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 Albrech