had anticipated in the years before the recession. implications for our thinking about the macroeconomy i have focused most of my remarks on the experiences of households at the lower ends of the income and wealth distributions, those households whose incomes improved the least in the years prior to the financial crisis and that suffered disproportionately as a result of the crisis and ensuing recession. to be clear, my approach of starting with inequality and differences across households is not a feature of most analyses of the macroeconomy, and the channels i have emphasized generally do not play key roles in most macro models. the typical macroeconomic analysis focuses on the general equilibrium behavior of “ representative ” households and firms, thereby abstracting from the consequences of inequality and other heterogeneity across households and instead focusing on the aggregate measures of spending determinants, including current income, wealth, interest rates, credit supply, and confidence or pessimism. in certain circumstances, this abstraction might be a reasonable simplification. for example, if the changes in the distribution of income or wealth, and the implications of those changes for the overall economy, are regular features of business cycles, then even an aggregate model without an explicit focus on distributional issues would capture those historical regularities. however, the narrative i have emphasized places economic inequality and the differential experiences of american families, particularly the highly adverse experiences of those least well positioned to absorb their “ realized shocks, ” closer to the front and center of the macroeconomic adjustment process. the effects of increasing income and wealth disparities – specifically, the stagnating wages and sharp increase in household debt in the years leading up to the crisis, combined with the rapid decline in house prices and contraction in credit that followed – may have resulted in dynamics that differ from historical experience and which are therefore not well captured by aggregate models. how these factors have interacted and the implications for the aggregate economy are subject to debate, but i have laid out some possible channels through which there could be effects and that i believe represent some particularly fruitful areas for continued research. see steven j. davis and till von wachter ( 2011 ), “ recessions and the costs of job loss, ” brookings papers on economic activity, fall, pp. 1 – 55. see jesse rothstein ( 2012 ), “ the labor market four years into the crisis : assessing structural explanations, ” ilrreview, vol. 65 ( july ), figure 11, p.

for the median income family. this less rosy perspective on the current state of the economy was suggested by several members of congress during the recent oversight hearings on monetary policy. i think the point is an important one and i agree that we should not let the recent favorable performance of inflation, unemployment and equity prices distract our attention from the importance of confronting a slow average rate of increase in living standards and lingering social problems that both reflect and are exacerbated by a widening in income inequality. however, other than through its pursuit of its legislative mandates of price stability and maximum sustainable employment, monetary policy cannot make a major contribution to the resolution of these problems. monetary policy, in particular cannot remedy increases in income inequality, raise the trend rate of increase in living standards, or combat inadequate opportunities for upward mobility out of poverty. it is, as always, important that we carry out our traditional responsibilities well, accommodating the maximum sustainable growth and achieving the maximum sustainable level of employment. but we cannot do more. regularities the second challenge is to explain why performance has been so favorable, at least in terms of inflation and unemployment. before exploring explanations of the puzzle, i want to focus on common features of cyclical expansions. in doing so, i will focus on cyclical expansions that have not been dominated by dramatic external shocks, such as the two episodes that were marked by steeply rising world oil prices - - first in the early 1970s and again in the late 1970s and early 1980s. while even these expansions share many of the patterns i emphasize later, their endings are dominated by the effects of the powerful supply shocks and policy responses to the shocks. expansions, by definition, begin with considerable economic slack, inherited from the previous recession. the economy typically makes a rapid transition from declining output ( the definition of recession ) to above - trend growth. in a loose way, trend growth refers to the growth in the economy ’ s productive capacity. when growth is above trend, production is expanding faster than the economy ’ s - 4productive capacity and, as a result, resource utilization rates rise. rising capacity utilization rates and falling unemployment rates are thus a typical feature of an expansion period. the natural dynamic of an expansion is for above - trend growth to continue until demand overtakes capacity, despite the best efforts of policy to avoid cyclical excesses. the end of the story is particularly important. expansions do not die of old age or lethargy, a spontaneous weakening