Understanding the Great Recession (Preliminary and Incomplete.)

We argue that the vast bulk of movements in aggregate real economic activity during the Great Recession were due to \u85nancial frictions interacting with the zero lower bound. We reach this conclusion looking through the lens of a New Keynesian model in which \u85rms face moderate degrees of price rigidities and no nominal rigidities in the wage setting process. Our model does a very good job of accounting for the joint behavior of labor and goods markets, as well as ination, during the Great Recession. According to the model the observed fall in TFP and the presence of a working capital channel played critical roles in accounting for the small size of the drop in ination that occurred during the Great Recession. The views expressed in this paper are those of the authors and do not necessarily reect those of the Board of Governors of the Federal Reserve System or of any other person associated with the Federal Reserve System