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Recession-specific recoveries: L’s, U’s and everything in between

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  • Donayre, Luiggi
  • Panovska, Irina

Abstract

We relax the assumption that recessions are all alike and propose a new model of output growth that allows for recession-specific recoveries. Output growth is modeled as the weighted average of Markov-switching processes that temporarily alter the level of real GDP (U-shaped) and those with permanent effects (L-shaped), where the recession-specific weight is endogenously estimated. Only the 1969–70 and 2007–09 recessions are characterized exclusively as U and L, respectively. The other 85% of U.S. recessions reflect a weighted combination of the two shapes, suggesting multiple sources of recessions. With respect to fitting output growth, our model outperforms those that generate either U- or L-shaped recoveries and the model-implied paths closely track the level of actual U.S. real GDP during recessions and recoveries.

Suggested Citation

  • Donayre, Luiggi & Panovska, Irina, 2021. "Recession-specific recoveries: L’s, U’s and everything in between," Economics Letters, Elsevier, vol. 209(C).
    • Handle: RePEc:eee:ecolet:v:209:y:2021:i:c:s0165176521004225
    DOI: 10.1016/j.econlet.2021.110145
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    More about this item

    Keywords

    Business cycles; Asymmetry; Recovery; Markov-switching;
    All these keywords.

    JEL classification:

    • C15 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Statistical Simulation Methods: General
    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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