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Evolution of Modern Business Cycle Models: Accounting for the Great Recession

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  • Patrick J. Kehoe
  • Virgiliu Midrigan
  • Elena Pastorino

Abstract

Modern business cycle theory focuses on the study of dynamic stochastic general equilibrium models that generate aggregate fluctuations similar to those experienced by actual economies. We discuss how this theory has evolved from its roots in the early real business cycle models of the late 1970s through the turmoil of the Great Recession four decades later. We document the strikingly different pattern of comovements of macro aggregates during the Great Recession compared to other postwar recessions, especially the 1982 recession. We then show how two versions of the latest generation of real business cycle models can account, respectively, for the aggregate and the cross-regional fluctuations observed in the Great Recession in the United States.

Suggested Citation

  • Patrick J. Kehoe & Virgiliu Midrigan & Elena Pastorino, 2018. "Evolution of Modern Business Cycle Models: Accounting for the Great Recession," NBER Working Papers 24741, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:24741
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    Cited by:

    1. Luca Pensieroso & Romain Restout, 2018. "The Gold Standard and the Great Depression: a Dynamic General Equilibrium Model," Discussion Papers (IRES - Institut de Recherches Economiques et Sociales) 2018016, Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES).
    2. Ray C. Fair, 2019. "Some Important Macro Points," Cowles Foundation Discussion Papers 2165, Cowles Foundation for Research in Economics, Yale University.
    3. Michel De Vroey, 2019. "Preface to the Chinese Edition of A History of Macroeconomics from Keynes to Lucas and Beyond," Discussion Papers (IRES - Institut de Recherches Economiques et Sociales) 2019006, Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES).
    4. Ray C. Fair, 2019. "Some Important Macro Points," Cowles Foundation Discussion Papers 2165R, Cowles Foundation for Research in Economics, Yale University, revised Jul 2019.
    5. Thomas Drechsel, 2018. "Earnings-Based Borrowing Constraints and Macroeconomic Fluctuations," 2018 Papers pdr141, Job Market Papers.

    More about this item

    JEL classification:

    • E13 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Neoclassical
    • 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
    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy

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