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Investment Hangover and the Great Recession

Author

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  • Andrei Shleifer

    (Harvard University)

  • Alp Simsek

    (Massachusetts Institute of Technology)

  • Matthew Rognlie

    (Massachusetts Institute of Technology)

Abstract

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 interest rate is bounded from below due to nominal rigidities, then the economy enters a liquidity trap with limited reallocation and low output. The drop in output also 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.

Suggested Citation

  • Andrei Shleifer & Alp Simsek & Matthew Rognlie, 2015. "Investment Hangover and the Great Recession," 2015 Meeting Papers 1171, Society for Economic Dynamics.
  • Handle: RePEc:red:sed015:1171
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    Cited by:

    1. Siddhartha Biswas & Andrew Hanson & Toan Phan, 2018. "Bubbly Recessions," Working Paper 18-5, Federal Reserve Bank of Richmond, revised 22 Feb 2018.
    2. Gianluca Benigno & Luca Fornaro, 2018. "Stagnation Traps," Review of Economic Studies, Oxford University Press, vol. 85(3), pages 1425-1470.
    3. Pablo Ottonello, 2015. "Capital Unemployment, Financial Shocks, and Investment Slumps," 2015 Meeting Papers 1153, Society for Economic Dynamics.
    4. Eric Zwick & Charles Nathanson & Anthony DeFusco, 2017. "Speculative Dynamics of Prices and Volume," 2017 Meeting Papers 239, Society for Economic Dynamics.
    5. Matthew Rognlie & Andrei Shleifer & Alp Simsek, 2018. "Investment Hangover and the Great Recession," American Economic Journal: Macroeconomics, American Economic Association, vol. 10(2), pages 113-153, April.
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    JEL classification:

    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates

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