A NEW KEYNESIAN PERSPECTIVE ON THE GREAT RECESSION WRITTEN BY: PETER IRELAND IN THE JOURNAL OF MONEY, CREDIT AND BANKING, VOL. 43 Tyler Halberg, Dylan Adler, and Kevin Reitz

THESIS  In terms of its macroeconomics, does the Great Recession of really stand apart from its two immediate predecessors: the milder recessions of and 2001?

BACKGROUND  Recession of  New Keynesian Model  Focus on post-1983 period  Compare the Great Recession of to:  Milder Recessions of and 2001  Monetary Policy Failed  recession had a combination of aggregate demand and supply disturbances  Difference  Shocks lasted longer and more severe

MODEL  Small-scale model that focuses on three main equations:  The New Keynesian IS Curve  Behavior of a representative household  The New Keynesian Phillips Curve  Optimizing Behavior of monopolistically competitive firms that face explicit costs of nominal price adjustment  Monetary Policy Rule  How the central bank adjusts the short-term nominal interest rate in response to movements in output and inflation  Empirical Analysis  Output  Inflation  Short-term nominal interest rate

MODEL (REPRESENTATIVE HOUSEHOLD)

MODEL (REPRESENTATIVE GOODS- PRODUCING FIRM)

MODEL (CENTRAL BANK)  Variant of the Taylor Rule  Output Growth or Inflation rise or fall below average

FIRST ORDER CONDITIONS

RESULTS  All three recessions were the result of adverse preference and technology shocks  Lower bound zero interest rate  Government had to implement a highly restrictive monetary policy  The monetary policy prolonged and intensified the recession

CONCLUSION  In terms of its macroeconomics, does the Great Recession of really stand apart from its two immediate predecessors: the milder recessions of and 2001?  All three recessions were caused by a combination of aggregate demand and supply disturbances  The Great Recession had adverse shocks that lased much longer and were much more severe  Zero lower bound on short-term interest rate  Need more complete and detailed assessment of monetary policymaking strategy

THREE THINGS TO TAKE AWAY…  Technology and preference shocks were the main causes of each recession  The zero lower bound nominal interest rates forced the Fed to implement a strict monetary policy through the Taylor rule, which prolonged and intensified the recession of  Monetary policy is limited when helping the economy respond efficiently to supply-side shocks