NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

The Tail that Wags the Economy: Beliefs and Persistent Stagnation

Julian Kozlowski, Laura Veldkamp, Venky Venkateswaran

NBER Working Paper No. 21719
Issued in November 2015, Revised in January 2017
NBER Program(s):Corporate Finance, Economic Fluctuations and Growth

The Great Recession was a deep downturn with long-lasting effects on credit markets, labor markets and output. While narratives about what caused the recession abound, the persistence of GDP below its pre-crisis trend is puzzling. We propose a simple persistence mechanism that can be easily quantified and combined with existing models, even complex ones. Our solution rests on the premise that no one knows the true distribution of shocks to the economy. If agents use observed macro data to estimate this distribution non-parametrically, then transitory events, especially extreme events, generate persistent changes in beliefs and thus in macro outcomes. We apply our tool to an existing model, designed to explain the onset of the great recession, and find that adding belief updating endogenously generates the persistence of the downward shift in US output, colloquially known as “secular stagnation.”

download in pdf format
   (771 K)

email paper

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w21719

Users who downloaded this paper also downloaded* these:
Miranda-Agrippino and Rey w21722 US Monetary Policy and the Global Financial Cycle
Orlik and Veldkamp w20445 Understanding Uncertainty Shocks and the Role of Black Swans
Blanchard, Cerutti, and Summers w21726 Inflation and Activity – Two Explorations and their Monetary Policy Implications
Kozeniauskas, Orlik, and Veldkamp w22384 The Common Origin of Uncertainty Shocks
Kueng w21772 Explaining Consumption Excess Sensitivity with Near-Rationality: Evidence from Large Predetermined Payments
 
Publications
Activities
Meetings
NBER Videos
Themes
Data
People
About

National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email: info@nber.org

Contact Us