Staff Reports
Inflation in the Great Recession and New Keynesian Models
May 2013  Number 618
Revised April 2014
JEL classification: C52, E31, E32, E37

Authors: Marco Del Negro, Marc P. Giannoni, and 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 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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