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Eighty years on, the Great Depression defies economists’ efforts to fully explain its causes, mechanisms and consequences. The Great Recession promises to be equally confounding. By the same token, both the Depression and the Recession unleashed streams of innovative research into largely neglected topics, thereby enriching economic understanding well beyond the crises themselves.
In this Research Digest, the Region reviews three examples of such work, recent studies by Minneapolis Fed economists and their colleagues on distinct aspects of the Great Recession. The first digest looks at international synchronization (or lack thereof) of economic cycles and the factors that may cause nations to climb or plummet in concert; the second explores interactions between financial frictions and firm-level volatility, and whether a model built around these phenomena might explain economic patterns seen in U.S. data between 2007 and 2009. And the third examines policy alternatives to pull an economy out of the doldrums when in the midst of what monetary economists refer to as a “liquidity trap”—when interest rates have reached the zero bound.
