Deep recessions

Tatiana Kirsanova, Charles Nolan and Maryam Shafiei

Economic Modelling, 2021, vol. 96, issue C, 310-323

Abstract: This paper demonstrates how a ‘modest’ financial shock can trigger a deep recession. We suggest that two factors can help generate it. The first is that the economy has accumulated a moderately high level of private debt by the time the adverse shock occurs. The second factor is when monetary policy, set under discretion, is restricted by the zero lower bound. These factors can result in a sharp contraction in output. Perhaps surprisingly, we use a standard DSGE model with financial frictions along the lines of Jermann and Quadrini (2012) to demonstrate this result and so do not need to rely on dysfunctional interbank markets.

Keywords: Financial frictions; Credit boom; Stagnation; ZLB (search for similar items in EconPapers)
JEL-codes: E23 E32 E44 G01 G32 (search for similar items in EconPapers)
Date: 2021
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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecmode:v:96:y:2021:i:c:p:310-323

DOI: 10.1016/j.econmod.2020.03.026

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