Mr Hall constructed a model, some of which he presented in the session and some of which came out later in his presidential lecture, in which the crisis gives rise to "financial frictions". Lenders must then be induced to provide additional credit through reductions in the real interest rate. But, he pointed out, interest rates are constrained by the zero lower bound. In his model, it might take a real interest rate of something like -2.5% to clear the economy. But obviously the Fed is constrained once nominal rates hit zero, and so the economy returns to its trend growth rate but never recovers the ground lost during the financial shock.

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