Understanding the Great Recession

Download or read book Understanding the Great Recession written by Board of Governors of the Federal Reserve System and published by CreateSpace. This book was released on 2015-03-10 with total page 46 pages. Available in PDF, EPUB and Kindle. Book excerpt: We argue that the vast bulk of movements in aggregate real economic activity during the Great Recession were due to Önancial frictions interacting with the zero lower bound. We reach this conclusion looking through the lens of a New Keynesian model in which Örms 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 ináation, 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 ináation that occurred during the Great Recession.