I would like to thank Michael Belongia, Paul Evans, and an anonymous referee for extremely helpful comments and suggestions on previous drafts of this paper. The opinions, findings, conclusions, and recommendations expressed herein are my own and do not reflect those of the National Bureau of Economic Research.
A New Keynesian Perspective on the Great Recession
Version of Record online: 19 JAN 2011
© 2011 The Ohio State University
Journal of Money, Credit and Banking
Volume 43, Issue 1, pages 31–54, February 2011
How to Cite
IRELAND, P. N. (2011), A New Keynesian Perspective on the Great Recession. Journal of Money, Credit and Banking, 43: 31–54. doi: 10.1111/j.1538-4616.2010.00364.x
- Issue online: 19 JAN 2011
- Version of Record online: 19 JAN 2011
- Received April 19, 2010; and accepted in revised form August 26, 2010.
- aggregate demand and supply;
- great recession;
- New Keynesian;
- zero lower bound
With an estimated New Keynesian model, this paper compares the “Great Recession” of 2007–09 to its two immediate predecessors in 1990–91 and 2001. The model attributes all three downturns to a similar mix of aggregate demand and supply disturbances. The most recent series of adverse shocks lasted longer and became more severe, however, prolonging and deepening the Great Recession. In addition, the zero lower bound on the nominal interest rate prevented monetary policy from stabilizing the U.S. economy as it had previously; counterfactual simulations suggest that without this constraint, output would have recovered sooner and more quickly in 2009.