Understanding the Great Recession
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.
The views expressed in this paper are those of the authors and do not necessarily reflect those of the Board of Governors of the Federal Reserve System, any other person associated with the Federal Reserve System, or the National Bureau of Economic Research. We are grateful for discussions with Gadi Barlevy.
Lawrence J. Christiano
Non-Northwestern compensated activities: 2010 through 2012.
Short lecture courses at: Bank of Korea, International Monetary Fund, Kiel Institute for World Economics, Gerzensee Study Center, Central Bank of Peru, Central Bank of Portugal, Central Bank of Colombia, Central Bank of Hungary, Swiss National Bank, Central Bank of the Czech Republic, Renmin University, China.
Consultant, Central Bank of Brazil.
Federal Reserve Bank of Atlanta, advisor.
Federal Reserve Bank of Chicago, advisor.
Federal Reserve Bank of Minneapolis, advisor.
Consultant, Global Markets Institute at Goldman Sachs.
Understanding the Great Recession, Lawrence J. Christiano, Martin S. Eichenbaum, Mathias Trabandt. in Lessons from the Financial Crisis for Monetary Policy, Gertler. 2015
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. citation courtesy of