Investment Hangover and the Great Recession | Zendy

Matthew Rognlie | Zendy; Andrei Shleifer | Zendy; Alp Simsek | Zendy

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Investment Hangover and the Great Recession

Author(s) -

Matthew Rognlie,

Andrei Shleifer,

Alp Simsek

Publication year - 2018

Publication title -

american economic journal macroeconomics

Language(s) - English

Resource type - Journals

SCImago Journal Rank - 10.443

H-Index - 61

eISSN - 1945-7707

pISSN - 1945-7715

DOI - 10.1257/mac.20160211

Subject(s) - economics , investment (military) , boom , recession , monetary economics , ex ante , capital (architecture) , capital accumulation , great recession , welfare , fixed investment , macroeconomics , labour economics , financial capital , capital formation , market economy , human capital , history , archaeology , environmental engineering , politics , political science , law , engineering

We present a model of investment hangover motivated by the Great Recession. Over-building 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. If 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 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 overbuiltcapital), and ex-ante policies that restrict investment.

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