1. Understanding the Great Recession
- Author:
- Lawrence J. Christiano, Martin Eichenbaum, and Mathias Trabandt
- Publication Date:
- 06-2014
- Content Type:
- Commentary and Analysis
- Institution:
- Board of Governors of the Federal Reserve System
- Abstract:
- We argue that the vast bulk of movements in aggregate real economic activity during the Great Recession were due to financial frictions. We reach this conclusion by looking through the lens of an estimated New Keynesian model in which firms face moderate degrees of price rigidities, no nominal rigidities in the wages and a binding zero lower bound constraint on the nominal interest rate. Our model does a good job of accounting for the joint behavior of labor and goods markets, as well as inflation, during the Great Recession. According to the model the observed fall in total factor productivity and the rise in the cost of working capital played critical roles in accounting for the small size of the drop in inflation that occurred during the Great Recession.
- Topic:
- Global Recession, Financial Crisis, Economic Theory, Interest Rates, Models, and Economic Crisis
- Political Geography:
- Global Focus