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Technological Revolutions and Debt Hangovers - Is There a Link?

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  • Dan Cao

    (Georgetown University)

  • Jean-Paul L'Huillier

    (EIEF)

Abstract

Using a model in which anticipations about the future determine current spending, we take a medium-frequency look at time series data around the Great Recession, the Great Depression, and the Japanese crisis of the 1990s. This leads us to highlight some common features of these three episodes: in all three cases we observe a boom followed by a slowdown in permanent productivity, with a peak about 10 years before the start of the recession. Spending follows a similar pattern, but with an important lag, that we estimate to be of 5 years. In our model, spending adjusts slowly due to imperfect information. Since spending remains high when productivity has already slowed down, a large accumulation of debt ensues. When agents finally recognize the slowdown of productivity, a deleveraging process takes place. The deleveraging drags the economy into a long consumption slump. The whole process, from the increase of productivity rates to the start of the decline in consumption, takes about 25 to 30 years. In the three cases, the pickup of productivity coincides with previously documented economy-wide technological changes.

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Bibliographic Info

Paper provided by Einaudi Institute for Economics and Finance (EIEF) in its series EIEF Working Papers Series with number 1216.

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Length: 33 pages
Date of creation: 2012
Date of revision: Feb 2013
Handle: RePEc:eie:wpaper:1216

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  1. Hoffmann, Mathias & Krause, Michael U. & Laubach, Thomas, 2011. "Long-run growth expectations and "global imbalances"," CFS Working Paper Series 2011/01, Center for Financial Studies (CFS).
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  3. Mark Aguiar & Gita Gopinath, 2007. "Emerging Market Business Cycles: The Cycle Is the Trend," Journal of Political Economy, University of Chicago Press, vol. 115, pages 69-102.
  4. Andrew Atkeson & Patrick J. Kehoe, 2006. "Modeling the transition to a new economy: lessons from two technological revolutions," Staff Report 296, Federal Reserve Bank of Minneapolis.
  5. Emine Boz & Christian Daude & C. Bora Durdu, 2011. "Emerging Market Business Cycles Revisited: Learning about the Trend," Koç University-TUSIAD Economic Research Forum Working Papers 1110, Koc University-TUSIAD Economic Research Forum.
  6. Boz, Emine & Daude, Christian & Bora Durdu, C., 2011. "Emerging market business cycles: Learning about the trend," Journal of Monetary Economics, Elsevier, vol. 58(6), pages 616-631.
  7. Christiano, Lawrence & Ilut, Cosmin & Motto, Roberto & Rostagno, Massimo, 2008. "Monetary policy and stock market boom-bust cycles," Working Paper Series 0955, European Central Bank.
  8. Nir Jaimovich & Sergio Rebelo, 2006. "Can News About the Future Drive the Business Cycle?," NBER Working Papers 12537, National Bureau of Economic Research, Inc.
  9. Luboš Pástor & Pietro Veronesi, 2009. "Technological Revolutions and Stock Prices," American Economic Review, American Economic Association, vol. 99(4), pages 1451-83, September.
  10. Robert J. Gordon & Robert Krenn, 2010. "The End of the Great Depression 1939-41: Policy Contributions and Fiscal Multipliers," NBER Working Papers 16380, National Bureau of Economic Research, Inc.
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