Working Paper: NBER ID: w20055
Authors: Marco Del Negro; Marc P. Giannoni; Frank Schorfheide
Abstract: 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 2008Q4. The model does so even though inflation remains very dependent on the evolution of economic activity and of monetary policy.
Keywords: DSGE models; Great Recession; inflation; financial frictions
JEL Codes: C52; E31; E32; E37
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Financial stress (G51) | Economic activity (E29) |
| Financial stress (G51) | Inflation (E31) |
| Expected future marginal costs (D40) | Inflation (E31) |
| Economic activity (E29) | Inflation (E31) |