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Engineering a paradox of thrift recession

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  • Zhen Huo
  • Jose-Victor Rios-Rull

Abstract

We build a variation of the neoclassical growth model in which financial shocks to households or wealth shocks (in the sense of wealth destruction) generate recessions. Two standard ingredients that are necessary are (1) the existence of adjustment costs that make the expansion of the tradable goods sector difficult and (2) the existence of some frictions in the labor market that prevent enormous reductions in real wages (Nash bargaining in Mortensen-Pissarides labor markets is enough). We pose a new ingredient that greatly magnifies the recession: a reduction in consumption expenditures reduces measured productivity, while technology is unchanged due to reduced utilization of production capacity. Our model provides a novel, quantitative theory of the current recessions in southern Europe.

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Bibliographic Info

Paper provided by Federal Reserve Bank of Minneapolis in its series Staff Report with number 478.

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Date of creation: 2012
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Handle: RePEc:fip:fedmsr:478

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Keywords: Recessions;

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  1. Krusell, Per & Mukoyama, Toshihiko & Sahin, Aysegul, 2009. "Labor-Market Matching with Precautionary Savings and Aggregate Fluctuations," CEPR Discussion Papers 7429, C.E.P.R. Discussion Papers.
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  16. Stephanie Schmitt-Grohé & Martín Uribe, 2012. "The Making Of A Great Contraction With A Liquidity Trap and A Jobless Recovery," NBER Working Papers 18544, National Bureau of Economic Research, Inc.
  17. Mark Aguiar & Erik Hurst, 2005. "Consumption versus Expenditure," Journal of Political Economy, University of Chicago Press, vol. 113(5), pages 919-948, October.
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Blog mentions

As found by EconAcademics.org, the blog aggregator for Economics research:
  1. Complicated Southern European recessions
    by Economic Logician in Economic Logic on 2013-05-22 14:51:00

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