Gauti Eggertsson. Was the New Deal (= NIRA) Contractionary? A world of Monopoly power Sticky prices and wages Deflationary shocks Zero lower bound (ZLB) NIRA (a supply restriction) reduced “natural output” but increased actual output. Borrowed Slides.
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Was the New Deal (= NIRA) Contractionary?
A world of
NIRA (a supply restriction) reduced “natural output” but increased actual output.
Cole and Ohanianfind a possible answer to the weak recovery in the cartelization of the US manufacturing sector.
Cole and Ohanian postulate that qualitatively this shock (NIRA) seems promising in explaining why output was so much and so consistently below trend from 1934-1939.
“We are agreed in that our primary need is to insure an increase in the general level of commodity prices. To this end simultaneous actions must be taken both in the economic and the monetary fields.”
Representative household utility function
Labor supply by industry
β = time preference discount
θ = substitution elasticity between products > 1
“Complete” financial markets no limit on borrowing
Nominal interest rate links current and future periods
Real interest rate enters household optimization condition
Real Wage = (1 + ω1)(MPL/MUc)
ω1= “Labor market markup” regulations favoring labor
Nominal Profits increase with “monopoly markup” = ω2
Always maximize profit
Flexible price solution
p = [θ/(θ – 1)] [W /(1 – ω2 )]
AS: (θ – 1)/θ = [(1 + ω1 )/(1 – ω2 ) ] MPL/MUc
(1 + ω1 )/(1 – ω2 ) = (θ – 1)/θ
Sticky price solution (each firm’s prices fixed for random period)
π = f(πe,expected output growth, policy wedge)
Policy wedge = (1 + ω1 )/(1 – ω2 )
The greater the policy wedge, the greater is πand the greater is πe
i = 1/β - 1
Solution: Commit to higher inflation