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  3. American Economic Journal: Macroeconomics
  4. April 2018
  5. Investment Hangover and the Great Recession

Investment Hangover and the Great Recession

  • Matthew Rognlie
  • Andrei Shleifer
  • Alp Simsek
American Economic Journal: Macroeconomics
vol. 10, no. 2, April 2018
(pp. 113-53)
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Abstract

We present a model of investment hangover motivated by the Great Recession. Overbuilding of durable capital such as housing requires a reallocation of productive resources to other sectors, which is facilitated by a reduction in the interest rate. When monetary policy is constrained, overbuilding induces a demand-driven recession with limited reallocation and low output. Investment in other capital initially declines due to low demand, but it later booms and induces an asymmetric recovery in which the overbuilt sector is left behind. Welfare can be improved by ex post policies that stimulate investment (including in overbuilt capital) and ex ante policies that restrict investment.

Citation

Rognlie, Matthew, Andrei Shleifer, and Alp Simsek. 2018. "Investment Hangover and the Great Recession." American Economic Journal: Macroeconomics, 10 (2): 113-53. DOI: 10.1257/mac.20160211

Additional Materials

JEL Classification

  • E22 Investment; Capital; Intangible Capital; Capacity
  • E23 Macroeconomics: Production
  • E32 Business Fluctuations; Cycles
  • E43 Interest Rates: Determination, Term Structure, and Effects
  • E52 Monetary Policy
  • R21 Urban, Rural, Regional, Real Estate, and Transportation Economics: Housing Demand
  • R31 Housing Supply and Markets
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