Deep Recessions and Slow Recoveries

Tatiana Kirsanova, Charles Nolan and Maryam Shafiei Deh Abad

Working Papers from Business School - Economics, University of Glasgow

Abstract: This paper studies the conditions under which a ‘modest’ financial shock can trigger a deep recession with a prolonged period of slow recovery. We suggest that two factors can generate such a profile. 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 is restricted by the zero lower bound. When present, these factors can result in a sharp contraction in output followed by a slow recovery. 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: 2016-04
New Economics Papers: this item is included in nep-dge, nep-pr~ and nep-mac
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Persistent link: https://EconPapers.repec.org/RePEc:gla:glaewp:2016_11

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