Escaping the great recession
Abstract
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 microfounded 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. (JEL E31, E32, E52, E62, G01, H63)
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Structural breaks in the conduct of monetary policy occurred in the post-millennial period.
“First, Bianchi, Lettau, and Ludvigson (2016) and Bianchi and Melosi (2017) present evidence of structural breaks in the conduct of monetary policy in the post-millennial period.”
From Threats to central bank independence: High-frequency identification with twitter (2023) · cites this paper as Bianchi and Melosi (2017)
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- Authors
- Bianchi, F., & Melosi, L.
- Affiliations
- Duke University (US)
- Federal Reserve Bank of Chicago (US)
- ORCID
- Bianchi, Francesco
- Venue
- American Economic Review
- Publisher
- American Economic Association
- Published
- 2017-04-01
- Volume
- 107
- Issue
- 4
- Pages
- 1030-1058
- ISSN
- 0002-8282 (ISSN-L)
- OpenAlex
- W3121794754
- Cited by
- 220
- References
- 108
- Citations by year
- 2026: 15 · 2025: 35 · 2024: 28 · 2023: 17 · 2022: 23 · 2021: 20 · 2020: 25 · 2019: 15 · 2018: 21 · 2017: 16 · 2016: 3 · 2014: 2
- FWCI
- 49.47
- Type
- journal article
- Language
- en
- Open access
- closed
- Locations
- American Economic Review (publishedVersion)
- RePEc: Research Papers in Economics (submittedVersion)
- Cadmus - EUI Research Repository (European University Institute) (submittedVersion)
- Topics
- Social Sciences › Economics, Econometrics and Finance › General Economics, Econometrics and Finance › Monetary Policy and Economic Impact
- Social Sciences › Economics, Econometrics and Finance › Economics and Econometrics › Economic theories and models
- Social Sciences › Economics, Econometrics and Finance › Economics and Econometrics › Fiscal Policies and Political Economy
- Keywords
- policy uncertainty, Great Recession, zero lower bound, public debt, fiscal imbalance, deflation, Markov-switching VAR, microfounded model, monetary policy, fiscal policy
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