Understanding the Great Recession

Lawrence Christiano, Martin Eichenbaum and Mathias Trabandt

American Economic Journal: Macroeconomics, 2015, vol. 7, issue 1, 110-67

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 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 drop in inflation that occurred during the Great Recession. (JEL E12, E23, E24, E31, E32, E52)

JEL-codes: E12 E23 E24 E31 E32 E52 (search for similar items in EconPapers)
Date: 2015
Note: DOI: 10.1257/mac.20140104
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Citations: View citations in EconPapers (285)

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Related works:
Working Paper: Understanding the Great Recession (2014)
Working Paper: Understanding the Great Recession (2014)
Working Paper: Understanding the Great Recession (2014)
Chapter: Understanding the Great Recession (2013)
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