Inflation in the Great Recession and New Keynesian Models
It has been argued that existing DSGE models cannot properly account for the evolution of key macroeconomic variables during and following the recent great recession. We challenge this argument by showing that a standard DSGE model with financial frictions available prior to the recent crisis successfully predicts a sharp contraction in economic activity along with a modest and protracted decline in inflation, following the rise in financial stress in 2008Q4. The model does so even though inflation remains very dependent on the evolution of economic activity and of monetary policy.
We thank Raiden Hasegawa for outstanding research assistance. F. Schorfheide gratefully acknowledges financial support from the National Science Foundation under Grant SES 1061725. We thank Gauti Eggertsson, Jon Faust, Michael Kiley, and participants at several seminars and conferences for their helpful feedback. The views expressed in this paper do not necessarily reflect those of the Federal Reserve Bank of New York, the Federal Reserve System, or the National Bureau of Economic Research.
Marco Del Negro & Marc P. Giannoni & Frank Schorfheide, 2015. "Inflation in the Great Recession and New Keynesian Models," American Economic Journal: Macroeconomics, American Economic Association, vol. 7(1), pages 168-96, January. citation courtesy of