The Tail that Wags the Economy: Beliefs and Persistent Stagnation

Julian Kozlowski, Laura Veldkamp and Venky Venkateswaran

No 2019-6, Working Papers from Federal Reserve Bank of St. Louis

Abstract: The Great Recession was a deep downturn with long-lasting effects on credit, employment and output. While narratives about its causes abound, the persistence of GDP below pre-crisis trends remains puzzling. We propose a simple persistence mechanism that can be quantified and combined with existing models. Our key premise is that agents don't know the true distribution of shocks, but use data to estimate it non-parametrically. Then, transitory events, especially extreme ones, generate persistent changes in beliefs and macro outcomes. Embedding this mechanism in a neoclassical model, we find that it endogenously generates persistent drops in economic activity after tail events.

Keywords: Stagnation; tail risks; propagation; belief-driven business cycles (search for similar items in EconPapers)
JEL-codes: D84 E32 (search for similar items in EconPapers)
Pages: 38 pages
Date: 2019-02-03
New Economics Papers: this item is included in nep-lma and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

Downloads: (external link)
https://s3.amazonaws.com/real.stlouisfed.org/wp/2019/2019-006.pdf Full text (application/pdf)
https://doi.org/10.20955/wp.2019.006 https://doi.org/10.20955/wp.2019.006 (text/html)

Related works:
Journal Article: The Tail That Wags the Economy: Beliefs and Persistent Stagnation (2020)
Working Paper: The Tail that Wags the Economy: Beliefs and Persistent Stagnation (2018)
Working Paper: The Tail that Wags the Economy: Beliefs and Persistent Stagnation (2015)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:fip:fedlwp:2019-006

Ordering information: This working paper can be ordered from

DOI: 10.20955/wp.2019.006

Access Statistics for this paper

More papers in Working Papers from Federal Reserve Bank of St. Louis Contact information at EDIRC.
Bibliographic data for series maintained by Scott St. Louis ().