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 neoclassical
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 surprisingly
well for the Depression in Germany.