Understanding the Great Recession

Lawrence Christiano, Martin Eichenbaum and Mathias Trabandt

No 20040, NBER Working Papers from National Bureau of Economic Research, Inc

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.

JEL-codes: E1 E2 E3 (search for similar items in EconPapers)
Date: 2014-04
New Economics Papers: this item is included in nep-dge, nep-mac and nep-opm
Note: EFG ME
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (41)

Published as Understanding the Great Recession , Lawrence J. Christiano, Martin S. Eichenbaum, Mathias Trabandt. in Lessons from the Financial Crisis for Monetary Policy , Gertler. 2015
Published as Lawrence J. Christiano & Martin S. Eichenbaum & Mathias Trabandt, 2015. "Understanding the Great Recession," American Economic Journal: Macroeconomics, American Economic Association, vol. 7(1), pages 110-67, January.

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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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