Financial frictions, trends, and the great recession

Abstract

We study the causes behind the shift in the level of U.S. GDP following the Great Recession. To this end, we propose a model featuring endogenous productivity à la Romer and a financial friction à la Kiyotaki-Moore. Adverse financial disturbances during the recession and the lack of strong tailwinds post-crisis resulted in a severe contraction and the downward shift in the economy's trend. Had financial conditions remained stable during the crisis, the economy would have grown at its average growth rate. From a historical perspective, the Great Recession was unique because of the size and persistence of adverse shocks, and the lackluster performance of favorable shocks since 2010. for valuable discussions and seminar participants at several institutions and conferences for comments. Ryo Jinnai gratefully acknowledges the support by JSPS KAKENHI grants (16K17080, 16H03626, and 17H00985) as well as the Hitotsubashi Institute for Advanced Study (HIAS).1 More formally, the shift in the GDP trend is detected by the flexible estimation of trends with regime shifts recently advanced by Eo and Kim (2012). We thank Yunjong Eo for helping with the estimation using their approach. 2 The forecast is built assuming that the economy will be growing at the average growth rate for the period 2009.Q2-2015.Q1.

Output Hysteresis and Optimal Monetary Policy

“…Guerron-Quintana and Jinnai (2019) also show that endogenous growth can generate positive co-movement of equity prices and investment in recent models of financial frictions with adverse asset liquidity shocks.…”

Output Hysteresis and Optimal Monetary Policy

“…Our paper is closely related to the recent work of Anzoategui, Comin, Gertler and Martinez (2019), Benigno and Fornaro (2018), Bianchi, Kung and Morales (2019), Garcia-Macia (2015), Guerron-Quintana and Jinnai (2019), Moran and Queraltó (2018) and Queralto (2019) who integrate endogenous growth into a business cycle framework. Among these papers, our framework is most similar to that of Benigno and Fornaro (2018), who identify the possibility of an economy entering a phase of persistent liquidity trap and low TFP growth due to pessimistic expectations.…”

“…In Appendix G, we build and calibrate a quantitative model, extending the Smets and Wouters (2007) model with endogenous (Schumpeterian) growth mechanism, to evaluate the quantitative import of output hysteresis. Since the model is fairly standard, we relegate its full presentation to the appendix (see also Guerron-Quintana and Jinnai (2019) for a an estimated endogenous growth business cycle model). 23 The key finding here is that quantitative magnitude of output hysteresis in our model depends on the elasticity of innovation intensity, measured by inverse of parameter ρ.…”

Productivity and Trade Dynamics in Sudden Stops

“…Comin and Gertler [2006] develop a model in which short-run shocks to the economy causes medium-term business cycles using a product-variety expansion type of endogenous growth framework. A similar framework is used by Queralto [2013] to study Korea's 1997 finacial crisis, by Guerron-Quintana and Jinnai [2018] to measure the cost of the U.S. Great Recession, by Gornemann…”