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The Great Recession and Financial Shocks

José-Víctor Ríos-Rull () and Zhen Huo
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Zhen Huo: New York University

No 16-3, Economic Policy Paper from Federal Reserve Bank of Minneapolis

Abstract: A case can be made for the Great Recession being the result of a large financial shock that makes household borrowing difficult. The channel involves large reductions in house prices, which trigger sharp reductions in consumption. {{p}} We discuss the ingredients necessary for a quantitative macroeconomic model to successfully implement such a theory. They include: wealth heterogeneity, where the majority of the population needs to acquire financing to purchase houses despite the large amount of wealth in the economy; sizable real frictions that hinder the transformation of consumption into exports and investment and that constrain the increase of household working hours; and a role for expenditures in contributing to productivity.

New Economics Papers: this item is included in nep-dge and nep-mac
Date: 2016-02-09
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