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...ce the fast decline observed in the aftermath of the earlier episodes. In the remainder of the paper we try to shed some light on the reasons for that change, using the model in Galí, Smets and Wouters (2011) as a reference framework. 3 The Slowing of Recoveries through the Lens of an Estimated New Keynesian Model In this section we use (updated) estimates of the model developed in Galí, Smets andWouters (2011; henceforth, GSW) to evaluate alternative hypotheses regarding the causes and nature of the recent slow recoveries. The GSW model constitutes an evolution of the well known framework in Smets and Wouters (2003, 2007). The main difference lies in the explicit introduction of unemployment, following the approach proposed in Galí (2011a, 2011b), and the use of a utility specification that parameterizes the strength of wealth effects (along the lines of Jaimovich and Rebelo (2009)). Next, we summarize the key ingredients of that approach, emphasizing the reduced form relations they give rise to. The assumed preferences are such that the household’s marginal disutility from having an additional member employed (expressed in terms of consumption) is given in a symmetric equilibrium by MRSt = χtZtN ϕ t , ...

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...ive rise to. The assumed preferences are such that the household’s marginal disutility from having an additional member employed (expressed in terms of consumption) is given in a symmetric equilibrium by MRSt = χtZtN ϕ t , where Nt denotes the employment rate, Zt is a distributed lag of consumption (thus restricting the short run impact of the latter’s changes on the marginal rate of substitution), and χt ≡ exp{ξt} is an exogenous labor supply shock. 6 Thus, and using lower case letters to denote the logs of the original variable, we have: mrst = zt + ϕnt + ξt (1) On the other hand, and as in Smets and Wouters (2007), the wage inflation equation implied by Calvo staggered wage setting is given by πwt = αw + γwπ p t−1 + βEt{πwt+1 − γwπ p t} − λw(µw,t − µnw,t) where πwt is wage inflation, π p t is price inflation (with γw representing the degree of indexing), µw,t is the average wage markup and µ n w,t is the natural wage markup (i.e. the one that would obtain under flexible wages). The latter is assumed to vary exogenously. Note that the average wage markup is given by µw,t ≡ (wt − pt)−mrst (2) where wt − pt is the average real wage (in logs). The labor force or participation rate, denoted by lt (in logs),...

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...gh the Lens of an Estimated New Keynesian Model In this section we use (updated) estimates of the model developed in Galí, Smets andWouters (2011; henceforth, GSW) to evaluate alternative hypotheses regarding the causes and nature of the recent slow recoveries. The GSW model constitutes an evolution of the well known framework in Smets and Wouters (2003, 2007). The main difference lies in the explicit introduction of unemployment, following the approach proposed in Galí (2011a, 2011b), and the use of a utility specification that parameterizes the strength of wealth effects (along the lines of Jaimovich and Rebelo (2009)). Next, we summarize the key ingredients of that approach, emphasizing the reduced form relations they give rise to. The assumed preferences are such that the household’s marginal disutility from having an additional member employed (expressed in terms of consumption) is given in a symmetric equilibrium by MRSt = χtZtN ϕ t , where Nt denotes the employment rate, Zt is a distributed lag of consumption (thus restricting the short run impact of the latter’s changes on the marginal rate of substitution), and χt ≡ exp{ξt} is an exogenous labor supply shock. 6 Thus, and using lower case letters to ...