Abstract: I investigate the extent to which modern Dynamic Stochastic General Equilibrium
(DSGE) models can produce labor market dynamics in response to a financial crisis
that are consistent with the experience of the Great Recession. Using the methods of
Boivin and Giannoni (2006) and Kryshko (2011), I estimate two DSGE models in a
data-rich environment. This allows me to examine the dynamics of economic series not
obtainable in traditional DSGE model estimation. I find that negative financial shocks
are associated with longer recoveries in real investment, capital intensive sectors of the
labor market and average unemployment duration when compared to other negative
output shocks. These results hold when the recession magnitude is normalized across
the shocks. The two models estimated in this paper include close variations of the
Smets & Wouters (2003, 2007) New Keynesian model and the FRBNY (Del Negro et
al. 2013) model that augments the Smets & Wouters model with a financial accelera-
tor. I find the FRBNY model with a financial accelerator is equipped with better tools
to identify the dynamics associated with the Great Recession and its recovery in regard
to many labor and financial metrics including the unemployment rate, total number of
employees by sector and consumer loans.

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