Investment Hangover and the Great Recession
We present a model of investment hangover motivated by the Great Recession. In our model, overbuilding of residential capital requires a reallocation of productive resources to nonresidential sectors, which is facilitated by a reduction in the real interest rate. If the fall in the interest rate is limited by the zero lower bound and nominal rigidities, then the economy enters a liquidity trap with limited reallocation and low output. The drop in output reduces nonresidential investment through a mechanism similar to the acceleration principle of investment. The burst in nonresidential investment is followed by an even greater boom due to low interest rates during the liquidity trap. The boom in nonresidential investment induces a partial and asymmetric recovery in which the residential sector is left behind, consistent with the broad trends of the Great Recession.
We thank Giacomo Ponzetto for very helpful comments. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.
Matthew Rognlie & Andrei Shleifer & Alp Simsek, 2018. "Investment Hangover and the Great Recession," American Economic Journal: Macroeconomics, vol 10(2), pages 113-153. citation courtesy of