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Demand, Growth, and Deleveraging

Author

Listed:
  • Brian Greaney

    (University of Washington)

  • Conor Walsh

    (Columbia University)

Abstract

We present empirical evidence that weak household demand contributed to a reduction in firm entry in the Great Recession. Motivated by this evidence, we study the general equilibrium response of aggregate economic growth to a severe deleveraging event. To do so, we combine a standard incomplete markets model with a class of endogenous growth models. A large reduction in credit access causes the zero lower bound to bind, inducing a drop in demand via employment rationing. Decreased demand in turn lowers the return to entrepreneurship and innovation, endogenously lowering productivity. We find that a persistent recession induced by deleveraging can significantly influence growth in productivity. Our main result is a powerful feedback effect: households increase savings in response to future slow growth, exacerbate the fall in demand, and further slow the recovery. (Copyright: Elsevier)

Suggested Citation

  • Brian Greaney & Conor Walsh, 2023. "Demand, Growth, and Deleveraging," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 51, pages 795-812, December.
    • Handle: RePEc:red:issued:21-132
    DOI: 10.1016/j.red.2023.08.004
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