DISEQUILIBRIUM DYNAMICS DURING THE GREAT-DEPRESSION

We test the flexibility of wages and prices in the U.S. before World W ar II using a simple two-market disequilibrium model. We test the mode l for four different tatonnement adjustment mechanisms and we find tha t the equilibrium restriction is strongly rejected in all cases. Hausm an specification tests reject the equilibrium restriction but do not r eject three of the disequilibrium specifications. Parameter estimates imply that the persistence of the Great Depression is not attributable to nominal rigidities but was caused by the system becoming dynamical ly neutral. We compute estimates of excess aggregate demand from 1892 to 1940 and find that a model in which adjustment obtains in prices in the goods market and in quantities in the labor market provides the b est description of the data.