Recessions, Recoveries, and Leverage

Sui Luo, Yu‐Fan Huang and Richard Startz

Oxford Bulletin of Economics and Statistics, 2025, vol. 87, issue 5, 991-1002

Abstract: When leverage is low, recoveries from recessions are likely to eventually return the economy to its pre‐recession growth path. When leverage is high, recoveries are likely to leave the economy below its pre‐recession growth path. In other words, low‐leverage recessions are likely to be U‐shaped, whereas high‐leverage recessions are likely to be L‐shaped. The increase in leverage over the postwar period indicates that recent recessions are much more likely to be L‐shaped. In particular, there is strong evidence that the Great Recession in the U.S. was L‐shaped. We also find similar effects of leverage for several other countries, but not all.

Date: 2025
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