Paradox of Thrift Recessions

Zhen Huo and José-Víctor Ríos-Rull

No 19443, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We build a variation of the neoclassical growth model in which both wealth shocks (in the sense of wealth destruction) and financial shocks to households generate recessions. The model features three mild departures from the standard model: (1) adjustment costs make it difficult to expand the tradable goods sector by reallocating factors of production from nontradables to tradables; (2) there is a mild form of labor market frictions (Nash bargaining wage setting with Mortensen-Pissarides labor markets); (3) goods markets for nontradables require active search from households wherein increases in consumption expenditures increase measured productivity. These departures provide a novel quantitative theory to explain recessions like those in southern Europe without relying on technology shocks.

JEL-codes: E00 E2 E32 (search for similar items in EconPapers)
Date: 2013-09
New Economics Papers: this item is included in nep-mac
Note: EFG
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Citations: View citations in EconPapers (42)

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Working Paper: Paradox of thrift recessions (2013)
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