TY  - JOUR
AU  - Christiano, Lawrence J
AU  - Eichenbaum, Martin S
AU  - Trabandt, Mathias
TI  - Understanding the Great Recession
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 20040
PY  - 2014
Y2  - April 2014
DO  - 10.3386/w20040
UR  - http://www.nber.org/papers/w20040
L1  - http://www.nber.org/papers/w20040.pdf
N1  - Author contact info:
Lawrence Christiano
Department of Economics
Northwestern University
2001 Sheridan Road
Evanston, IL 60208
Tel: 847/491-8231
Fax: 847/491-7001
E-Mail: l-christiano@northwestern.edu

Martin S. Eichenbaum
Department of Economics
Northwestern University
2003 Sheridan Road
Evanston, IL  60208
Tel: 847/491-8232
Fax: 847/491-7001
E-Mail: eich@northwestern.edu

Mathias Trabandt
Goethe University Frankfurt
Theodor-W.-Adorno-Platz 3  
60323 Frankfurt am Main
Germany
E-Mail: mathias.trabandt@gmail.com
M1  - published as Lawrence J. Christiano, Martin S. Eichenbaum, Mathias Trabandt. "Understanding the Great Recession," in Mark Gertler, organizer, "Lessons from the Financial Crisis for Monetary Policy" American Economic Journal: Macroeconomics, Volume 7, no. 1 (2015)

AB  - 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.
ER  -