Working Paper: NBER ID: w24741
Authors: Patrick J. Kehoe; Virgiliu Midrigan; Elena Pastorino
Abstract: Modern business cycle theory focuses on the study of dynamic stochastic general equilibrium models that generate aggregate fluctuations similar to those experienced by actual economies. We discuss how this theory has evolved from its roots in the early real business cycle models of the late 1970s through the turmoil of the Great Recession four decades later. We document the strikingly different pattern of comovements of macro aggregates during the Great Recession compared to other postwar recessions, especially the 1982 recession. We then show how two versions of the latest generation of real business cycle models can account, respectively, for the aggregate and the cross-regional fluctuations observed in the Great Recession in the United States.
Keywords: business cycle; Great Recession; financial frictions; dynamic stochastic general equilibrium
JEL Codes: E13; E32; E52; E61; E62
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Deteriorating financial conditions (F65) | Greater labor market contractions (J49) |
| Financial distress (G33) | Declines in output (E23) |
| Financial distress (G33) | Declines in employment (J63) |
| Financial frictions (G19) | Greater hiring constraints (J23) |
| Increased uncertainty and volatility in productivity shocks (D89) | Reduced economic activity (F69) |
| Financial conditions (E66) | Employment (J68) |
| Financial conditions (E66) | Output (Y10) |
| Cross-sectional dispersion of firm growth rates (L25) | Financial conditions affected firms differently (G32) |