Working Paper: NBER ID: w19443
Authors: Zhen Huo; Josvctor Rosrull
Abstract: We build a variation of the neoclassical growth model in which both wealth shocks (in the sense of wealth destruction) and financial shocks to households generate recessions. The model features three mild departures from the standard model: (1) adjustment costs make it difficult to expand the tradable goods sector by reallocating factors of production from nontradables to tradables; (2) there is a mild form of labor market frictions (Nash bargaining wage setting with Mortensen-Pissarides labor markets); (3) goods markets for nontradables require active search from households wherein increases in consumption expenditures increase measured productivity. These departures provide a novel quantitative theory to explain recessions like those in southern Europe without relying on technology shocks.
Keywords: Recession; Household Savings; Economic Modeling; Southern Europe
JEL Codes: E00; E2; E32
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| increased household savings (D14) | recession (E32) |
| increased household savings (D14) | decreased consumption (E21) |
| decreased consumption (E21) | recession (E32) |
| increased household savings (D14) | decreased productivity (O49) |
| decreased productivity (O49) | recession (E32) |
| wealth shocks (G51) | decreased consumption (E21) |
| wealth shocks (G51) | recession (E32) |
| financial shocks (F65) | increased household savings (D14) |
| increased household savings (D14) | adjustment costs (J30) |
| increased household savings (D14) | labor market frictions (J29) |