Switching-track after the Great Recession

Francesca Vinci and Omar Licandro ()

No 1260, Working Papers from Barcelona School of Economics

Abstract: We propose a theoretical framework to reconcile episodes of V-shaped and L-shaped recovery, encompassing the behaviour of the U.S. economy before and after the Great Recession. In a DSGE model with endogenous growth, negative demand shocks destroy productive capacity, moving GDP to a lower trajectory. A Taylor rule policy designed to reduce the output gap may counterbalance the shocks, preventing the destruction of economic capacity and inducing a V-shaped recovery. However, when shocks are deep and persistent enough, like during the Great Recession, they call for a downward revision of potential output measures, the so-called switching-track, weakening the recovering role of monetary policy and inducing an L-shaped recovery. When calibrated to the U.S. economy, the model replicates well the L-shaped recovery and switching-track that followed the Great Recession, as well as the V-shaped recoveries that followed the oil shock recessions.

Keywords: great recession; monetary policy; endogenous growth; hysteresis; economic recovery; trend shift; switching-track; supply destruction prevention; economic capacity (search for similar items in EconPapers)
JEL-codes: E12 E22 E32 E52 O41 (search for similar items in EconPapers)
Date: 2021-05
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Related works:
Working Paper: Switching-Track after the Great Recession (2021)
Working Paper: Switching-track after the Great Recession (2021)
Working Paper: Switching-track after the Great Recession (2020)
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