Investment Hangover and the Great Recession

Matthew Rognlie, Andrei Shleifer and Alp Simsek

No 20569, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We present a model of investment hangover motivated by the Great Recession. In our model, overbuilding of residential capital requires a reallocation of productive resources to nonresidential sectors, which is facilitated by a reduction in the real interest rate. If the fall in the interest rate is limited by the zero lower bound and nominal rigidities, then the economy enters a liquidity trap with limited reallocation and low output. The drop in output reduces nonresidential investment through a mechanism similar to the acceleration principle of investment. The burst in nonresidential investment is followed by an even greater boom due to low interest rates during the liquidity trap. The boom in nonresidential investment induces a partial and asymmetric recovery in which the residential sector is left behind, consistent with the broad trends of the Great Recession.

JEL-codes: E22 E32 E4 (search for similar items in EconPapers)
Date: 2014-10
New Economics Papers: this item is included in nep-mac and nep-opm
Note: EFG ME
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Citations: View citations in EconPapers (11)

Published as Matthew Rognlie & Andrei Shleifer & Alp Simsek, 2018. "Investment Hangover and the Great Recession," American Economic Journal: Macroeconomics, vol 10(2), pages 113-153.

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Related works:
Journal Article: Investment Hangover and the Great Recession (2018)
Working Paper: Investment Hangover and the Great Recession (2015)
Working Paper: Investment Hangover and the Great Recession (2014)
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