What Caused the Great Recession in the Eurozone?

Since 2008, the Eurozone has undergone two recessions, which together constitute the “Great Recession.” The combination of a decline in output and disinflation as well as a persistent decline in inflation suggests that contractionary monetary policy was one factor. This chapter makes two methodological points. First, in analyzing the causes of the Great Recession, it is important to distinguish between credit and monetary policy. Second, a multiplicity of estimated models can “explain” the Great Recession. In practice, economists choose between models through an associated narrative that adds additional information about causation.The Great Recession, which encompassed back-to-back recessions in the Eurozone, has reinvigorated debate over the causes of recession. Given the prominence of disruptions to financial markets, it has also generated controversy about the desirability of central bank “inflation targeting,” especially the question of whether central banks should add a measure of financial stability to their traditional objectives for output and inflation (Curdia and Woodford, 2009; Woodford, 2012). Answers are complicated if the origin of the Great Recession lay in a combination of contractionary monetary policy and disruption to financial intermediation. The discussion here of recession in the Eurozone suggests this possibility and makes two methodological points…