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Reconstructing the great recession

  • Michele Boldrin
  • Carlos Garriga
  • Adrian Peralta-Alva
  • Juan M. Sánchez

This paper evaluates the role of the construction sector in accounting for the performance of the U.S. economy in the last decade. During the Great Recession (2008-09) employment in the construction sector experienced an unprecedented decline that followed the largest expansion in employment since the 1950s. A simple input-output exercise reveals that the contribution of construction to the variations of the macro variables was significant. Despite the small size of the construction sector, its inter- linkages with other sectors in the economy propagate the effect from changes in the demand of residential investment, hence amplifying the effect on the overall economy. The importance of interlinkages is illustrated in a static model and then quantified in a generalized framework that includes xed and residential investment. The model is calibrated to reproduce the boom-bust dynamics of construction employment in the period 2000-10. We nd that construction and its interlinkages account for a large share of the actual changes in aggregate employment and gross domestic product during the expansion and the recession. Through the lens of the standard business cycle accounting, the recession generated in the model, as in the data, is due to the worsening of the labor wedge.

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Paper provided by Federal Reserve Bank of St. Louis in its series Working Papers with number 2013-006.

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Date of creation: 2013
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Handle: RePEc:fip:fedlwp:2013-006
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  1. Michael Keane & Richard Rogerson, 2012. "Micro and Macro Labor Supply Elasticities: A Reassessment of Conventional Wisdom," Journal of Economic Literature, American Economic Association, vol. 50(2), pages 464-76, June.
  2. Carlos Garriga & Rodolfo E. Manuelli & Adrian Peralta-Alva, 2012. "A model of price swings in the housing market," Working Papers 2012-022, Federal Reserve Bank of St. Louis.
  3. Robert F. Martin, 2005. "The baby boom: predictability in house prices and interest rates," International Finance Discussion Papers 847, Board of Governors of the Federal Reserve System (U.S.).
  4. Davis, Morris A. & Heathcote, Jonathan, 2007. "The price and quantity of residential land in the United States," Journal of Monetary Economics, Elsevier, vol. 54(8), pages 2595-2620, November.
  5. Kiyotaki, Nobuhiro & Michaelides, Alexander & Nikolov, Kalin, 2010. "Winners and Losers in Housing Markets," CEPR Discussion Papers 7953, C.E.P.R. Discussion Papers.
  6. Yoshiro Miwa & Matthew Chambers & Carlos Garriga & Don E. Schlagenhauf, 2004. "Accounting for Changes in the Homeownership Rate," CIRJE F-Series CIRJE-F-312, CIRJE, Faculty of Economics, University of Tokyo.
  7. Rodolfo E. Manuelli & Adrian Peralta-Alva, 2011. "Sectoral shocks, reallocation frictions, and optimal government spending," Working Papers 2011-017, Federal Reserve Bank of St. Louis.
  8. N. Gregory Mankiw & David N. Weil, 1988. "The Baby Boom, The Baby Bust, and the Housing Market," NBER Working Papers 2794, National Bureau of Economic Research, Inc.
  9. Song, In Ho, 2010. "House Prices and Consumption," MPRA Paper 27481, University Library of Munich, Germany.
  10. Black, Fischer, 1995. " Interest Rates as Options," Journal of Finance, American Finance Association, vol. 50(5), pages 1371-76, December.
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