Switching-track after the Great Recession

Francesca Vinci and Omar Licandro ()

No 2596, Working Paper Series from European Central Bank

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. JEL Classification: E12, E22, E32, O41, E52

Keywords: economic capacity; economic recovery; endogenous growth; monetary policy; supply destruction prevention (search for similar items in EconPapers)
Date: 2021-10
New Economics Papers: this item is included in nep-cba, nep-dge and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (8)

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Related works:
Working Paper: Switching-Track after the Great Recession (2021)
Working Paper: Switching-track after the Great Recession (2020)
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Persistent link: https://EconPapers.repec.org/RePEc:ecb:ecbwps:20212596

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