The Making Of A Great Contraction With A Liquidity Trap and A Jobless Recovery
AbstractThe great contraction of 2008 pushed the U.S. economy into a protracted liquidity trap (i.e., a long period with zero nominal interest rates and inflationary expectations below target). In addition, the recovery was jobless (i.e., output growth recovered but unemployment lingered). This paper presents a model that captures these three facts. The key elements of the model are downward nominal wage rigidity, a Taylor-type interest-rate feedback rule, the zero bound on nominal rates, and a confidence shock. Lack-of-confidence shocks play a central role in generating jobless recoveries, for fundamental shocks, such as disturbances to the natural rate, are shown to generate recessions featuring recoveries with job growth. The paper considers a monetary policy that can lift the economy out of the slump. Specifically, it shows that raising the nominal interest rate to its intended target for an extended period of time, rather than exacerbating the recession as conventional wisdom would have it, can boost inflationary expectations and thereby foster employment.
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Bibliographic InfoPaper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 18544.
Date of creation: Nov 2012
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Find related papers by JEL classification:
- E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution
- E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
- E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
- E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
This paper has been announced in the following NEP Reports:
- NEP-ALL-2012-12-06 (All new papers)
- NEP-DGE-2012-12-06 (Dynamic General Equilibrium)
- NEP-MAC-2012-12-06 (Macroeconomics)
- NEP-MON-2012-12-06 (Monetary Economics)
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Blog mentionsAs found by EconAcademics.org, the blog aggregator for Economics research:
- The Making Of A Great Contraction With A Liquidity Trap and A Jobless Recovery
by Christian Zimmermann in NEP-DGE blog on 2012-12-08 23:59:43
- Is it time for the Fed to raise its policy rate?
by David Andolfatto in MacroMania on 2013-01-20 02:18:00
- Nathaniel Throckmorton & Benjamin Keen & Alexander Richter & William Gavin, 2013.
"Global Dynamics at the Zero Lower Bound,"
2013 Meeting Papers
839, Society for Economic Dynamics.
- William T. Gavin & Benjamin D. Keen & Alexander Richter & Nathaniel Throckmorton, 2013. "Global dynamics at the zero lower bound," Working Papers 2013-007, Federal Reserve Bank of St. Louis.
- William T. Gavin & Benjamin D. Keen & Alexander W. Richter & Nathaniel A. Throckmorton, 2013. "Global Dynamics at the Zero Lower Bound," Auburn Economics Working Paper Series auwp2013-17, Department of Economics, Auburn University.
- Zhen Huo & José-Víctor Ríos-Rull, 2013.
"Paradox of Thrift Recessions,"
NBER Working Papers
19443, National Bureau of Economic Research, Inc.
- Zhen Huo & Jose-Victor Rios-Rull, 2012.
"Engineering a paradox of thrift recession,"
478, Federal Reserve Bank of Minneapolis.
- Albinowski, Maciej & Ciżkowicz, Piotr & Rzońca, Andrzej, 2013. "Distrust in the ECB – product of failed crisis prevention or of inappropriate cure?," MPRA Paper 48242, University Library of Munich, Germany.
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