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Understanding the Great Recession

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  • Lawrence J. Christiano
  • Martin S. Eichenbaum
  • Mathias Trabandt

Abstract

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.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 20040.

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Date of creation: Apr 2014
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Publication status: Forthcoming: Understanding the Great Recession , Lawrence J. Christiano, Martin S. Eichenbaum, Mathias Trabandt. in Lessons from the Financial Crisis for Monetary Policy , Gertler. 2014
Handle: RePEc:nbr:nberwo:20040

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  1. New York University & Saki Bigio, 2010. "Endogenous Liquidity and the Business Cycle," 2010 Meeting Papers 672, Society for Economic Dynamics.
  2. Mark Aguiar & Erik Hurst & Loukas Karabarbounis, 2013. "Time Use during the Great Recession," American Economic Review, American Economic Association, vol. 103(5), pages 1664-96, August.
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Cited by:
  1. Kilian, Lutz & Vigfusson, Robert J., 2014. "The role of oil price shocks in causing U.S. recessions," CFS Working Paper Series 460, Center for Financial Studies (CFS).

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