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Evolution of Modern Business Cycle Models: Accounting for the Great Recession

Patrick J. Kehoe, Virgiliu Midrigan, Elena Pastorino

NBER Working Paper No. 24741
Issued in June 2018
NBER Program(s):Economic Fluctuations and Growth, International Finance and Macroeconomics, Labor Studies, Monetary Economics

Modern business cycle theory focuses on the study of dynamic stochastic general equilibrium models that generate aggregate fluctuations similar to those experienced by actual economies. We discuss how this theory has evolved from its roots in the early real business cycle models of the late 1970s through the turmoil of the Great Recession four decades later. We document the strikingly different pattern of comovements of macro aggregates during the Great Recession compared to other postwar recessions, especially the 1982 recession. We then show how two versions of the latest generation of real business cycle models can account, respectively, for the aggregate and the cross-regional fluctuations observed in the Great Recession in the United States.

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Document Object Identifier (DOI): 10.3386/w24741

Published: Patrick J. Kehoe & Virgiliu Midrigan & Elena Pastorino, 2018. "Evolution of Modern Business Cycle Models: Accounting for the Great Recession," Journal of Economic Perspectives, vol 32(3), pages 141-166. citation courtesy of

 
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