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Deep recessions

Author

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  • Kirsanova, Tatiana
  • Nolan, Charles
  • Shafiei, Maryam

Abstract

This paper demonstrates how a ‘modest’ financial shock can trigger a deep recession. We suggest that two factors can help generate it. The first is that the economy has accumulated a moderately high level of private debt by the time the adverse shock occurs. The second factor is when monetary policy, set under discretion, is restricted by the zero lower bound. These factors can result in a sharp contraction in output. Perhaps surprisingly, we use a standard DSGE model with financial frictions along the lines of Jermann and Quadrini (2012) to demonstrate this result and so do not need to rely on dysfunctional interbank markets.

Suggested Citation

  • Kirsanova, Tatiana & Nolan, Charles & Shafiei, Maryam, 2021. "Deep recessions," Economic Modelling, Elsevier, vol. 96(C), pages 310-323.
    • Handle: RePEc:eee:ecmode:v:96:y:2021:i:c:p:310-323
    DOI: 10.1016/j.econmod.2020.03.026
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    References listed on IDEAS

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    Keywords

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    JEL classification:

    • E23 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Production
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G01 - Financial Economics - - General - - - Financial Crises
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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