Why Has the U.S. Economy Stagnated Since the Great Recession?

Abstract

Since the Great Recession in 2007-09, U.S. real GDP has failed to return to its previously projected path, a phenomenon widely associated with secular stagnation. We investigate whether this stagnation was due to hysteresis effects from the Great Recession, a persistent negative output gap following the recession, or slower trend growth for other reasons. To do so, we develop a new Markov-switching time series model of output growth that accommodates two different types of recessions, those which permanently alter the level of real GDP and those with only temporary effects. We also account for structural change in trend growth. Estimates from our model suggest that the Great Recession generated a large persistent negative output gap rather than any substantial hysteresis effects, with the economy eventually recovering to a lower trend path which appears to be due to a reduction in productivity growth that began prior to the onset of the Great Recession.

Are Recoveries all the Same: GDP and TFP?*

“…The way we incorporate uncertain shapes of recoveries has some similarity with a recent paper by Eo and Morley (2020). They extend Kim et al .…”

“…Friedman (1993) suggested the ‘plucking model’, arguing that growth following recessions is unusually high. Researchers, notably Kim, Morley and Piger (2005), Morley and Piger (2012), and Eo and Morley (2020) have done extensive work asking whether the typical recession is followed by a high‐speed recovery, answering the question in the affirmative. (For more on recoveries following recessions, see also Beaudry and Koop, 1993; Kim and Nelson, 1999; Kim and Murray, 2002.)…”

Estimating and accounting for the output gap with large Bayesian vector autoregressions

“…First, recall that Figure in the previous section suggests that the estimated output gap is not completely robust to the size of the system during the Great Recession, although it is, perhaps surprisingly, always smaller in magnitude than in the 1981–82 recession. In a univariate setting, accounting for a break in long‐run output growth around the Great Recession has been shown to significantly alter inference about the output gap based on long‐run forecasts (e.g., Eo & Morley, ; Kamber et al., ). Thus we check if this is also the case in a multivariate setting, with the estimates across different‐sized systems possibly influenced to differing degrees by a failure to account for structural change.…”

Accelerating Peak Dating in a Dynamic Factor Markov-Switching Model

“…The magnitudes of the eigenvalues of the correlation matrix of the growth rates of the four coincident indicators motivate the choice of a single factor. The choice of only a single lag for the factor and idiosyncratic components, similar to Chauvet (1998) 2000, and time-varying mean growth rates, see Eo and Kim (2016), Eo and Morley (2019) and Doz et al (2020), are left for future research. To identify the factor, we fix the first factor loading i.e.…”