Deep recessions

Kirsanova, T. , Nolan, C. and Shafiei Deh Abad, M. (2020) Deep recessions. Economic Modelling, (doi: 10.1016/j.econmod.2020.03.026) (Early Online Publication)

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Abstract

This paper demonstrates how a ‘modest’ financial shock can trigger a deep recession. We suggest that two factors can help generate it. The first is that the economy has accumulated a moderately high level of private debt by the time the adverse shock occurs. The second factor is when monetary policy, set under discretion, is restricted by the zero lower bound. These factors can result in a sharp contraction in output. Perhaps surprisingly, we use a standard DSGE model with financial frictions along the lines of Jermann and Quadrini (2012) to demonstrate this result and so do not need to rely on dysfunctional interbank markets.

Item Type:Articles
Status:Early Online Publication
Refereed:Yes
Glasgow Author(s) Enlighten ID:Nolan, Professor Charles and Shafiei Deh Abad, Maryam and Kirsanova, Professor Tatiana
Authors: Kirsanova, T., Nolan, C., and Shafiei Deh Abad, M.
College/School:College of Social Sciences > Adam Smith Business School > Economics
Journal Name:Economic Modelling
Publisher:Elsevier
ISSN:0264-9993
ISSN (Online):1873-6122
Published Online:12 April 2020
Copyright Holders:Copyright © 2020 Elsevier B.V.
First Published:First published in Economic Modelling 2020
Publisher Policy:Reproduced in accordance with the publisher copyright policy

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