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Federal Reserve Bank of New York
Staff Reports
Inflation in the Great Recession and New Keynesian models
Marco Del Negro
Marc 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 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.


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Marco Del Negro & Marc Giannoni & Frank Schorfheide, Inflation in the Great Recession and New Keynesian models, Federal Reserve Bank of New York, Staff Reports 618, 2013, revised 01 Apr 2014.
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Note: 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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Keywords: Great recession; missing disinflation; fundamental inflation; DSGE models; Bayesian estimation
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