Inflation in the Great Recession and New Keynesian Models - Federal Reserve Bank of New York

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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.

Available only in PDF pdf

51 pages / 743 kb

For a published version of this report, see Marco Del Negro, Marc P. Giannoni, and Frank Schorfheide, "Inflation in the Great Recession and New Keynesian Models," American Economic Journal: Macroeconomics 7, no. 1 (January 2015): 168-96.

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