Escaping the Great Recession

Francesco Bianchi and Leonardo Melosi

American Economic Review, 2017, vol. 107, issue 4, 1030-58

Abstract: We show that policy uncertainty about how the rising public debt will be stabilized accounts for the lack of deflation in the US economy at the zero lower bound. We first estimate a Markov-switching VAR to highlight that a zero-lower-bound regime captures most of the comovements during the Great Recession: a deep recession, no deflation, and large fiscal imbalances. We then show that a microfounded model that features policy uncertainty accounts for these stylized facts. Finally, we highlight that policy uncertainty arises at the zero lower bound because of a trade-off between mitigating the recession and preserving long-run macroeconomic stability.

JEL-codes: E31 E32 E52 E62 G01 H63 (search for similar items in EconPapers)
Date: 2017
Note: DOI: 10.1257/aer.20160186
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Citations: View citations in EconPapers (140)

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Related works:
Working Paper: Escaping the Great Recession (2016)
Working Paper: Escaping the Great recession (2015)
Working Paper: Escaping the Great Recession (2014)
Working Paper: Escaping the Great Recession (2014)
Working Paper: Escaping the Great Recession (2013)
Working Paper: Escaping the Great Recession (2013)
Working Paper: Escaping the Great Recession (2013)
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