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Investment Hangover and the Great Recession

Matthew Rognlie (), Andrei Shleifer and Alp Simsek

American Economic Journal: Macroeconomics, 2018, vol. 10, issue 2, 113-53

Abstract: We present a model of investment hangover motivated by the Great Recession. Overbuilding of durable capital such as housing requires a reallocation of productive resources to other sectors, which is facilitated by a reduction in the interest rate. When monetary policy is constrained, overbuilding induces a demand-driven recession with limited reallocation and low output. Investment in other capital initially declines due to low demand, but it later booms and induces an asymmetric recovery in which the overbuilt sector is left behind. Welfare can be improved by ex post policies that stimulate investment (including in overbuilt capital) and ex ante policies that restrict investment.

JEL-codes: E22 E23 E32 E43 E52 R21 R31 (search for similar items in EconPapers)
Date: 2018
Note: DOI: 10.1257/mac.20160211
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Working Paper: Investment Hangover and the Great Recession (2015) Downloads
Working Paper: Investment Hangover and the Great Recession (2014) Downloads
Working Paper: Investment Hangover and the Great Recession (2014) Downloads
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Handle: RePEc:aea:aejmac:v:10:y:2018:i:2:p:113-53