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Financial frictions, trends, and the great recession

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  • Pablo A. Guerron‐Quintana
  • Ryo Jinnai

Abstract

We study the causes behind the shift in the level of U.S. GDP following the Great Recession. To this end, we propose a model featuring endogenous productivity à la Romer and a financial friction à la Kiyotaki–Moore. Adverse financial disturbances during the recession and the lack of strong tailwinds post‐crisis resulted in a severe contraction and the downward shift in the economy's trend. Had financial conditions remained stable during the crisis, the economy would have grown at its average growth rate. From a historical perspective, the Great Recession was unique because of the size and persistence of adverse shocks, and the lackluster performance of favorable shocks since 2010.

Suggested Citation

  • Pablo A. Guerron‐Quintana & Ryo Jinnai, 2019. "Financial frictions, trends, and the great recession," Quantitative Economics, Econometric Society, vol. 10(2), pages 735-773, May.
    • Handle: RePEc:wly:quante:v:10:y:2019:i:2:p:735-773
    DOI: 10.3982/QE702
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