Demand Composition and the Strength of Recoveries

Martin Beraja and Christian Wolf

No 29304, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We argue that recoveries from demand-driven recessions with expenditure cuts concentrated in services or non-durables will tend to be weaker than recoveries from recessions more biased towards durables. Intuitively, the smaller the bias towards more durable goods, the less the recovery is buffeted by pent-up demand. We show that, in a standard multi-sector business-cycle model, this prediction holds if and only if, following an aggregate demand shock to all categories of spending (e.g., a monetary shock), expenditure on more durable goods reverts back faster. This testable condition receives ample support in U.S. data. We then use (i) a semi-structural shift-share and (ii) a structural model to quantify this effect of varying demand composition on recovery dynamics, and find it to be large. We also discuss implications for optimal stabilization policy.

JEL-codes: E32 E52 (search for similar items in EconPapers)
Date: 2021-09
New Economics Papers: this item is included in nep-mac and nep-mon
Note: EFG ME
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