Technological Revolutions and Debt Hangovers - Is There a Link?

Using a model in which anticipations about the future determine current spending, we take a medium-frequency look at time series data around the Great Recession, the Great Depression, and the Japanese crisis of the 1990s. This leads us to highlight some common features of these three episodes: in all three cases we observe a boom followed by a slowdown in permanent productivity, with a peak about 10 years before the start of the recession. Spending follows a similar pattern, but with an important lag, that we estimate to be of 5 years. In our model, spending adjusts slowly due to imperfect information. Since spending remains high when productivity has already slowed down, a large accumulation of debt ensues. When agents finally recognize the slowdown of productivity, a deleveraging process takes place. The deleveraging drags the economy into a long consumption slump. The whole process, from the increase of productivity rates to the start of the decline in consumption, takes about 25 to 30 years. In the three cases, the pickup of productivity coincides with previously documented economy-wide technological changes.