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Investment Hangover and the Great Recession

Andrei Shleifer, Alp Simsek and Matthew Rognlie ()
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Alp Simsek: Massachusetts Institute of Technology

No 1171, 2015 Meeting Papers from Society for Economic Dynamics

Abstract: We present a model of investment hangover motivated by the Great Recession. In our model, overbuilding of residential capital requires a reallocation of productive resources to nonresidential sectors, which is facilitated by a reduction in the real interest rate. If the interest rate is bounded from below due to nominal rigidities, then the economy enters a liquidity trap with limited reallocation and low output. The drop in output also reduces nonresidential investment through a mechanism similar to the acceleration principle of investment. The burst in nonresidential investment is followed by an even greater boom due to low interest rates during the liquidity trap. The boom in nonresidential investment induces a partial and asymmetric recovery in which the residential sector is left behind, consistent with the broad trends of the Great Recession.

New Economics Papers: this item is included in nep-mac and nep-opm
Date: 2015
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Related works:
Journal Article: Investment Hangover and the Great Recession (2018) Downloads
Working Paper: Investment Hangover and the Great Recession (2014) Downloads
Working Paper: Investment Hangover and the Great Recession (2014) Downloads
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Persistent link: https://EconPapers.repec.org/RePEc:red:sed015:1171

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