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Inflation in the Great Recession and New Keynesian models

  • Del Negro, Marco

    (Federal Reserve Bank of New York)

  • Giannoni, Marc
  • Schorfheide, Frank

    ()

    (University of Pennsylvania)

It has been argued that existing DSGE models cannot properly account for the evolution of key macroeconomic variables during and following the recent great recession. We challenge this argument by showing that a standard DSGE model with financial frictions available prior to the recent crisis successfully predicts a sharp contraction in economic activity along with a modest and protracted decline in inflation following the rise in financial stress in the fourth quarter of 2008. The model does so even though inflation remains very dependent on the evolution of economic activity and of monetary policy.

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Paper provided by Federal Reserve Bank of New York in its series Staff Reports with number 618.

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Length: 51 pages
Date of creation: 2013
Date of revision: 01 Apr 2014
Handle: RePEc:fip:fednsr:618
Note: For a published version of this report, see Marco Del Negro, Marc P. Giannoni, and Frank Schorfheide, "Inflation in the Great Recession and New Keynesian Models," American Economic Journal: Macroeconomics 7, no. 1 (January 2015): 168-96.
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