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Paradox of thrift recessions

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  • Zhen Huo
  • Jose-Victor Rios-Rull

Abstract

We build a variation of the neoclassical growth model in which both wealth shocks (in the sense of wealth destruction) and financial shocks to households generate recessions. The model features three mild departures from the standard model: (1) adjustment costs make it difficult to expand the tradable goods sector by reallocating factors of production from nontradables to tradables; (2) there is a mild form of labor market frictions (Nash bargaining wage setting with Mortensen-Pissarides labor markets); (3) goods markets for nontradables require active search from households wherein increases in consumption expenditures increase measured productivity. These departures provide a novel quantitative theory to explain recessions like those in southern Europe without relying on technology shocks.

Suggested Citation

  • Zhen Huo & Jose-Victor Rios-Rull, 2013. "Paradox of thrift recessions," Staff Report 490, Federal Reserve Bank of Minneapolis.
  • Handle: RePEc:fip:fedmsr:490
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    Cited by:

    1. Krueger, D. & Mitman, K. & Perri, F., 2016. "Macroeconomics and Household Heterogeneity," Handbook of Macroeconomics, Elsevier.
    2. Zhen Huo & Jose-Victor Rios-Rull, 2015. "Tightening Financial Frictions on Households, Recessions, and Price Reallocations," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 18(1), pages 118-139, January.
    3. Hintermaier, Thomas & Koeniger, Winfried, 2015. "Household Debt and Crises of Confidence," Economics Working Paper Series 1518, University of St. Gallen, School of Economics and Political Science.
    4. Claudio Baccianti & Andreas Löschel, 2014. "The Role of Product and Process Innovation in CGE Models of Environmental Policy," WWWforEurope Working Papers series 68, WWWforEurope.
    5. Finkelstein Shapiro, Alan & Mandelman, Federico S., 2016. "Remittances, entrepreneurship, and employment dynamics over the business cycle," Journal of International Economics, Elsevier, pages 184-199.
    6. repec:eee:macchp:v2-1427 is not listed on IDEAS
    7. Li, Jieying & Zhang, Xin, 2017. "House Prices, Home Equity, and Personal Debt Composition," Working Paper Series 343, Sveriges Riksbank (Central Bank of Sweden).

    More about this item

    Keywords

    Recessions ; Productivity;

    JEL classification:

    • E00 - Macroeconomics and Monetary Economics - - General - - - General
    • E2 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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