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Evolution of Modern Business Cycle Models: Accounting for the Great Recession

Author

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  • 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.

Suggested Citation

  • Patrick J. Kehoe & Virgiliu Midrigan & Elena Pastorino, 2018. "Evolution of Modern Business Cycle Models: Accounting for the Great Recession," Staff Report 566, Federal Reserve Bank of Minneapolis.
    • Handle: RePEc:fip:fedmsr:566
    DOI: 10.21034/sr.566
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    2. John Stachurski & Junnan Zhang, 2019. "Dynamic Programming with State-Dependent Discounting," Papers 1908.08800, arXiv.org, revised Oct 2020.
    3. Smirnyagin, Vladimir, 2023. "Returns to scale, firm entry, and the business cycle," Journal of Monetary Economics, Elsevier, vol. 134(C), pages 118-134.
    4. Charles Ka Yui LEUNG, 2022. "Housing and Macroeconomics," ISER Discussion Paper 1197, Institute of Social and Economic Research, Osaka University.
    5. Cakici, S. Meral, 2024. "Risk premium in a real business cycle framework," International Review of Economics & Finance, Elsevier, vol. 91(C), pages 111-122.
    6. Thomas Drechsel, 2023. "Earnings-Based Borrowing Constraints and Macroeconomic Fluctuations," American Economic Journal: Macroeconomics, American Economic Association, vol. 15(2), pages 1-34, April.
    7. Heejeong Kim, 2022. "Inequality, Disaster risk, and the Great Recession," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 45, pages 187-216, July.
    8. Luca Pensieroso & Romain Restout, 2021. "The Gold Standard and the International Dimension of the Great Depression," Working Papers of BETA 2021-21, Bureau d'Economie Théorique et Appliquée, UDS, Strasbourg.
    9. Luca Pensieroso & Romain Restout, 2018. "The Gold Standard and the Great Depression: a Dynamic General Equilibrium Model," LIDAM Discussion Papers IRES 2018016, Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES).
    10. Ray C. Fair, 2019. "Some Important Macro Points," Cowles Foundation Discussion Papers 2165, Cowles Foundation for Research in Economics, Yale University.
    11. Michel De Vroey, 2019. "Preface to the Chinese Edition of A History of Macroeconomics from Keynes to Lucas and Beyond," LIDAM Discussion Papers IRES 2019006, Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES).
    12. Ray C. Fair, 2019. "Some Important Macro Points," Cowles Foundation Discussion Papers 2165R, Cowles Foundation for Research in Economics, Yale University, revised Jul 2019.
    13. Cardi, Olivier & Restout, Romain, 2023. "Sectoral fiscal multipliers and technology in open economy," Journal of International Economics, Elsevier, vol. 144(C).
    14. José Pedro Bastos Neves & Willi Semmler, 2022. "Credit, output and financial stress: A non‐linear LVSTAR application to Brazil," Metroeconomica, Wiley Blackwell, vol. 73(3), pages 900-923, July.
    15. Bruno Coric & Blanka Peric Skrabic, 2020. "Income Tax Evasion: Recovery from Economic Disasters," CERGE-EI Working Papers wp676, The Center for Economic Research and Graduate Education - Economics Institute, Prague.

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    More about this item

    Keywords

    External validation; Financial frictions; New Keynesian models;
    All these keywords.

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E13 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Neoclassical
    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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