## 1 Introduction

The U.S. National Bureau of Economic Research (NBER) has reported that the Great Recession began in December 2007 and ended in June 2009. The emergence of sub-prime loan losses in 2007 began the recession and exposed other risky loans and over-inflated asset prices. With loan losses mounting and the collapse of Lehman Brothers on September 15, 2008, a major panic broke out in the inter-bank loan market. The financial crisis played a significant role in the failure of key businesses, in the declines in consumer wealth–estimated in trillions of US dollars–, and a downturn in economic activity, all leading to the 2008–2012 global recession and contributing to the European sovereign-debt crisis. In The New York Times in January 2009, Paul Krugman commented on this crisis as seemingly being the beginning of "a second Great Depression." The central debate about the origin of the recession has been focused on the respective parts played by the public monetary policy and by the practices of private financial institutions. The U.S. Senate's Levin–Coburn Report asserted that the financial institution crisis, one of the causes, was the result of "high risk, complex financial products; undisclosed conflicts of interest; the failure of regulators, the credit rating agencies, and the market itself to rein in the excesses of Wall Street." In order to strengthen the financial sector, the Troubled Asset Relief Program (TARP), in which assets and equity are purchased from financial institutions by the U.S. government, was enforced and originally was used to authorize the expenditures of $700 billion in October 2008.

The purpose of this study is to analyze the mutual relationship among macroeconomic and financial endogenous variables in terms of business cycles and to identify what structural exogenous shocks contributed to the Great Recession using a dynamic stochastic general equilibrium (DSGE) model. Because we obtained a broad consensus that solvency and liquidity problems of the financial institutions are chief among the fundamental factors causing the recession itself, as described above, it is plausible to embed financial frictions in both the banking and the corporate sectors of a New Keynesian DSGE model. In fact, according to Ireland (2011), who was the first to attempt to analyse the impact of the recession using a New Keynesian DSGE model, there are three sets of considerations that are premature for existing DSGE models. First, banking failures and liquidity dry-ups should be endogenously explained with other fundamental macroeconomic variables for producing economic insights. Second, most recessions have been accompanied by an increase in bankruptcies among financial and nonfinancial firms alike. And recessions have featured systematic problems in the banking and loan industry. And third, declines in housing prices and problems in the credit markets might have played an independent and causal role in the Great Recession's severity. By identifying the structural shocks generated from two financial frictions in both the financial and the nonfinancial sectors and integrating them into a DSGE model, our study will look into the former two exercises. In addition, we will focus on the extreme change of volatility in financial markets and across the economy as a whole in the recession, by estimating the time-varying volatility of these structural shocks.

To this end, we will follow Nishiyama et al. (2011) who have already studied the US economy using a New Keynesian DSGE model with these two financial frictions in a data-rich environment. In this model, with asymmetric information between borrowers and lenders, banks have two roles in generating two agency costs: one is as the lenders to the corporate sector and the other is as the borrowers from depositors. Decomposing the effects of the two kinds of agency costs on macroeconomic fluctuations might be important for finding out the origin of the recession as well as measuring the degree of damage to the US economy. The data-rich approach is a useful method, separating the coherence of en-