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Investment Hangover and the Great Recession

Listed author(s):
  • Matthew Rognlie
  • Andrei Shleifer
  • Alp Simsek

We present a model of investment hangover motivated by the Great Recession. In our model, overbuilding of residential capital requires a reallocation of productive resources to nonresidential sectors, which is facilitated by a reduction in the real interest rate. If the fall in the interest rate is limited by the zero lower bound and nominal rigidities, then the economy enters a liquidity trap with limited reallocation and low output. The drop in output reduces nonresidential investment through a mechanism similar to the acceleration principle of investment. The burst in nonresidential investment is followed by an even greater boom due to low interest rates during the liquidity trap. The boom in nonresidential investment induces a partial and asymmetric recovery in which the residential sector is left behind, consistent with the broad trends of the Great Recession.

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File URL: http://www.nber.org/papers/w20569.pdf
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 20569.

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Date of creation: Oct 2014
Handle: RePEc:nbr:nberwo:20569
Note: EFG ME
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