TY - JOUR
T1 - Understanding the great recession
AU - Christiano, Lawrence J.
AU - Eichenbaum, Martin S.
AU - Trabandt, Mathias
PY - 2015
Y1 - 2015
N2 - We argue that the vast bulk of movements in aggregate real economic activity during the Great Recession were due to financial frictions. We reach this conclusion by looking through the lens of an estimated New Keynesian model in which firms face moderate degrees of price rigidities, no nominal rigidities in wages, and a binding zero lower bound constraint on the nominal interest rate. 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 drop in inflation that occurred during the Great Recession.
AB - We argue that the vast bulk of movements in aggregate real economic activity during the Great Recession were due to financial frictions. We reach this conclusion by looking through the lens of an estimated New Keynesian model in which firms face moderate degrees of price rigidities, no nominal rigidities in wages, and a binding zero lower bound constraint on the nominal interest rate. 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 drop in inflation that occurred during the Great Recession.
UR - http://www.scopus.com/inward/record.url?scp=84921499670&partnerID=8YFLogxK
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U2 - 10.1257/mac.20140104
DO - 10.1257/mac.20140104
M3 - Article
AN - SCOPUS:84921499670
VL - 7
SP - 110
EP - 167
JO - American Economic Journal: Macroeconomics
JF - American Economic Journal: Macroeconomics
SN - 1945-7707
IS - 1
ER -