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Opinion

The tail that wags the economy: The origin of secular stagnation

By Julian Kozlowski, Laura Veldkamp and Vaidyanathan (“Venky”) Venkateswaran

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Perhaps the fact that this recession has been more persistent than others is because, before it took place, it was perceived as an extremely unlikely event.

The typical post-WWII recession has a distinct trough, followed by a sharp rebound toward a stable trend line. Following the Great Recession, however, this rebound is missing. The missing recovery is what Summers (2016) and Eggertsson & Mehotra (2014) call ‘secular stagnation’ (see also Teulings and Baldwin 2014).

Why did the dysfunction in credit markets impact the real economy for so long? Many explanations for the real effects have been advanced, and these are still being compared to data (e.g. Gertler and Kiyotaki 2010, Brunnermeier and Sannikov 2014, and Gourio 2012, 2013). Existing theories about why the crisis took place assume that the shocks that triggered it were persistent. Yet such shocks in previous business cycle episodes were not so persistent. This differential in persistence is just as puzzling as the origin of the crisis. What most explanations of the Great Recession miss is a mechanism that takes some large, transitory shocks and then transforms them into long-lived economic responses.

Perhaps the fact that this recession has been more persistent than others is because, before it took place, it was perceived as an extremely unlikely event. Today, the question of whether the financial crisis might repeat itself arises frequently. Financial panic is a new reality that was never perceived as a possibility before.

Read full article as published by VoxEU.org.

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Julian Kozlowski is a PhD candidate in Economics.
Laura Veldkamp is a William R. Berkley Professor of Economics.
Vaidyanathan Venkateswaran is an Assistant Professor of Economics.