TAILIEUCHUNG - How the Great Recession Was Brought to an End

In this paper, we use the Moody’s Analytics model of the . economy—adjusted to accommodate some recent financial-market policies—to simulate the macroeconomic effects of the government’s total policy response. We find that its effects on real GDP, jobs, and inflation are huge, and probably averted what could have been called Great Depression . For example, we estimate that, without the government’s response, GDP in 2010 would be about lower, payroll employment would be less by some 8½ million jobs, and the nation would now be experiencing deflation. . | How the Great Recession Was Brought to an End JULY 27 2010 Prepared By Alan S. Blinder Gordon S. Rentschler Memorial Professor of Economics Princeton University blinder@ Mark Zandi Chief Economist Moody s Analytics How the Great Recession Was Brought to an End BY ALAN S. BLINDER AND MARK ZANDI1 The . government s response to the financial crisis and ensuing Great Recession included some of the most aggressive fiscal and monetary policies in history. The response was multifaceted and bipartisan involving the Federal Reserve Congress and two administrations. Yet almost every one of these policy initiatives remain controversial to this day with critics calling them misguided ineffective or both. The debate over these policies is crucial because with the economy still weak more government support may be needed as seen recently in both the extension of unemployment benefits and the Fed s consideration of further easing. In this paper we use the Moody s Analytics model of the . economy-adjusted to accommodate some recent financial-market policies to simulate the macroeconomic effects of the government s total policy response. We find that its effects on real GDP jobs and inflation are huge and probably averted what could have been called Great Depression . For example we estimate that without the government s response GDP in 2010 would be about lower payroll employment would be less by some 8 million jobs and the nation would now be experiencing deflation. When we divide these effects into two components one attributable to the fiscal stimulus and the other attributable to financial-market policies such as the TARP the bank stress tests and the Fed s quantitative eas-ing we estimate that the latter was substantially more powerful than the former. Nonetheless the effects of the fiscal stimulus alone appear very substantial raising 2010 real GDP by about holding the unemployment rate about 1 .

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