Final Report Summary - RESOCONBUCY (Rethinking sources and consequences of business cycles)
The goal of this project was to get a better understanding of the causes and the consequences of a large, global and persistent business cycle episode like the Great Recession of 2007-2009. Although my research on the topic is still on-going, I believe I have made some progress in the area. Some of the key results can be summarized as follows:
- We have developed a new simple theoretical framework that shows how a deep recession and a subsequent slow recovery, like the Great Recession of 2007-2009, can be the outcome of a self-fulfilling confidence crisis. We have demonstrated how such crises are more likely to happen during times when household wealth is low, and thus suggest that the fall in housing prices prior to the recession was an important factor in explaining the crisis. We have also provided micro and macro evidence in support of this hypothesis.
- We have, for the first time, documented the spatial pattern of diffusion of a recession (with particular attention to the Great Recession) across counties in the US. We have also shown how the extent of economic linkages between close-by counties can have important consequence for the amplification (or muting) of aggregate shocks.
- We have compared and contrasted two leading explanations for the global nature of the Great Recession. The first is that the global recession was initiated by a US shock, then transmitted abroad. The second hypothesis is that a global shock, in particular a global liquidity crisis, hit all countries at the same time. Our empirical and theoretical work suggest that the second hypothesis is the most relevant.
- We have provided a comprehensive analysis of the distribution of income and consumption during and after the Great Recession in the US. One upshot of our analysis is that the Great Recession has left U.S. households only marginally more unequal—due to mitigating effect of redistribution policies—but uniformly poorer.
- We have developed a new simple theoretical framework that shows how a deep recession and a subsequent slow recovery, like the Great Recession of 2007-2009, can be the outcome of a self-fulfilling confidence crisis. We have demonstrated how such crises are more likely to happen during times when household wealth is low, and thus suggest that the fall in housing prices prior to the recession was an important factor in explaining the crisis. We have also provided micro and macro evidence in support of this hypothesis.
- We have, for the first time, documented the spatial pattern of diffusion of a recession (with particular attention to the Great Recession) across counties in the US. We have also shown how the extent of economic linkages between close-by counties can have important consequence for the amplification (or muting) of aggregate shocks.
- We have compared and contrasted two leading explanations for the global nature of the Great Recession. The first is that the global recession was initiated by a US shock, then transmitted abroad. The second hypothesis is that a global shock, in particular a global liquidity crisis, hit all countries at the same time. Our empirical and theoretical work suggest that the second hypothesis is the most relevant.
- We have provided a comprehensive analysis of the distribution of income and consumption during and after the Great Recession in the US. One upshot of our analysis is that the Great Recession has left U.S. households only marginally more unequal—due to mitigating effect of redistribution policies—but uniformly poorer.