General Discussion

Benjamin Friedman wondered how economists should judge the role of monetary policy in causing recessions. When monetary policy responds to a shock to the economy, that response may trigger another problem to which monetary policy must then respond. Inflation may ultimately end up outside the central bank's comfort zone, and monetary policy tightens in response. Was the resulting recession then "caused" by monetary policy, or by the original shock, or by one of the intermediate steps in the chain of events? Friedman gave the example of the recession of the early 1980s: Paul Volcker did not deliberately set out to create a recession but was responding to various events, many of them (like the 1979 increase in oil prices) originating outside the United States, and this chain of events and responses ended in recession. Thus, monetary policy is an important but somewhat ambiguous part of the cyclical story.

William Brainard discussed the complexity of the relationships between firms and employees. He argued that the models of employer-employee wage bargaining in the paper, which assume a single employer and a representative employee engaging in bargaining, ignore the differences between the marginal and the average worker in a firm. This simplification is less of a problem if all workers are represented by a completely centralized union, but this is usually not the case. Brainard suggested that the model's assumption was artificial and ignored the constraints imposed by within-firm labor markets.

William Nordhaus said that he would have liked rigid wages and prices to be addressed more in the paper, particularly to explain the moderate decline in the layoff rate since 2005. Another possible explanation for this decline may be the "Europeanization" of some American institutions: it is becoming increasingly difficult to lay off workers. Nordhaus also wondered why employment has not become less volatile given the striking decline in output volatility. Arithmetically, these phenomena are reconciled by a decline in the cyclicality of productivity, but that decline suggests a reduction in labor market rigidities that appears inconsistent with the declining layoff rate in recent years.

Lawrence Summers noted that the recessions preceding World War II were "modern recessions" by Robert Hall's definition, because they were not caused by inflation prompting the Federal Reserve to tighten monetary policy. "Modern" recessions seem to be caused by a more widespread and unquantifiable loss of confidence, which Robert Shiller has written about elsewhere. Summers suggested that modern and traditional recessions may have different implications for productivity, which might be a useful way of categorizing them.