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Inflation in the Great Recession and New Keynesian Models

  • Marco Del Negro
  • Marc P. Giannoni
  • Frank Schorfheide

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 2008Q4. 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 National Bureau of Economic Research, Inc in its series NBER Working Papers with number 20055.

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Date of creation: Apr 2014
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Publication status: published as Marco Del Negro & Marc P. Giannoni & Frank Schorfheide, 2015. "Inflation in the Great Recession and New Keynesian Models," American Economic Journal: Macroeconomics, American Economic Association, vol. 7(1), pages 168-96, January.
Handle: RePEc:nbr:nberwo:20055
Note: EFG ME
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