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Understanding the Great Recession

  • Christiano, Lawrence J.


    (Northwestern University)

  • Eichenbaum, Martin


    (Northwestern University)

  • Trabandt, Mathias


    (Board of Governors of the Federal Reserve System (U.S.))

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 Board of Governors of the Federal Reserve System (U.S.) in its series International Finance Discussion Papers with number 1107.

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Length: 61 pages
Date of creation: 02 Apr 2014
Date of revision:
Handle: RePEc:fip:fedgif:1107
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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. David E. Altig & Lawrence J. Christiano & Martin Eichenbaum & Jesper Linde, 2004. "Firm-specific capital, nominal rigidities, and the business cycle," Working Paper 0416, Federal Reserve Bank of Cleveland.
  3. 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.
  4. Ken Binmore & Ariel Rubinstein & Asher Wolinsky, 1986. "The Nash Bargaining Solution in Economic Modelling," RAND Journal of Economics, The RAND Corporation, vol. 17(2), pages 176-188, Summer.
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  1. Understanding the Great Recession (AEJ:MA 2015) in ReplicationWiki

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