Escaping the Great Recession / Francesco Bianchi, Leonardo Melosi.

Format:

Book

Author/Creator:

Bianchi, Francesco.

Contributor:

National Bureau of Economic Research.

Melosi, Leonardo.

Series:

Working Paper Series (National Bureau of Economic Research) no. w20238.

NBER working paper series no. w20238

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2014.

Summary:

We show that policy uncertainty about how the rising public debt will be stabilized accounts for the lack of deflation in the US economy at the zero lower bound. We first estimate a Markov-switching VAR to highlight that a zero-lower-bound regime captures most of the comovements during the Great Recession: a deep recession, no deflation, and large fiscal imbalances. We then show that a micro-founded model that features policy uncertainty accounts for these stylized facts. Finally, we highlight that policy uncertainty arises at the zero lower bound because of a trade-off between mitigating the recession and preserving long-run macroeconomic stability.

Notes:

Print version record

June 2014.