Understanding the Great Recession

Lawrence Christiano, Martin Eichenbaum and Mathias Trabandt

No 1107, International Finance Discussion Papers from Board of Governors of the Federal Reserve System (U.S.)

Abstract: We argue that the vast bulk of movements in aggregate real economic activity during the Great Recession were due to financial frictions interacting with the zero lower bound. We reach this conclusion looking through the lens of a New Keynesian model in which firms face moderate degrees of price rigidities and no nominal rigidities in the wage setting process. 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.

Keywords: Inflation; unemployment; labor force; zero lower bound (search for similar items in EconPapers)
JEL-codes: E24 E32 (search for similar items in EconPapers)
Pages: 61 pages
Date: 2014-04-02
New Economics Papers: this item is included in nep-dge and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (17)

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Related works:
Journal Article: Understanding the Great Recession (2015)
Working Paper: Understanding the Great Recession (2014)
Working Paper: Understanding the Great Recession (2014)
Chapter: Understanding the Great Recession (2013)
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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedgif:1107

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