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Federal Reserve Bank of Minneapolis
Staff Report
Evolution of Modern Business Cycle Models: Accounting for the Great Recession
Patrick J. Kehoe
Virgiliu Midrigan
Elena Pastorino

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.

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Patrick J. Kehoe & Virgiliu Midrigan & Elena Pastorino, Evolution of Modern Business Cycle Models: Accounting for the Great Recession, Federal Reserve Bank of Minneapolis, Staff Report 566, 14 Jun 2018.
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Keywords: New Keynesian models; Financial frictions; External validation
DOI: 10.21034/sr.566
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Fed-in-Print is the central catalog of publications within the Federal Reserve System. It is managed and hosted by the Economic Research Division, Federal Reserve Bank of St. Louis.

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