At Liberty Street Economics: Developing a Narrative: The Great Recession and Its Aftermath Andrea Tambalotti and Argia Sbordone.
What precipitated the U.S. economy into the worst recession since the Great Depression? And what headwinds are holding back the recovery?
...
As it turns out, only four of these shocks account for the bulk of the movements in GDP and inflation since the Great Recession.
• A shock to total factor productivity (TFP)...
• A financial (or spread) shock...
• A shock to investment demand...
• Shocks to monetary policy...
...
As it turns out, only four of these shocks account for the bulk of the movements in GDP and inflation since the Great Recession.
• A shock to total factor productivity (TFP)...
• A financial (or spread) shock...
• A shock to investment demand...
• Shocks to monetary policy...
They show two graphs, then continue:
The first feature of this decomposition that we want to highlight is the paramount importance of spread shocks (in purple) during the recession. Starting at the end of 2007, the economy experiences a sequence of large shocks to credit spreads, driven by an increase in the perceived riskiness of borrowers. This progressive increase in risk is accompanied by deteriorating credit conditions, culminating in two spikes in spreads in the third and fourth quarters of 2008 with the failure of Lehman Brothers. These abrupt increases in the cost of credit account for a decline in quarterly GDP growth of more than 5 percentage points (annualized), which is about half of the total drop in output growth at the nadir of the recession. Inflation is also significantly affected by these shocks, which account for about three quarters of the decline in inflation in the second half of 2008.
The other half of the decline in GDP growth in 2008 stems from significant declines in TFP...
The other half of the decline in GDP growth in 2008 stems from significant declines in TFP...
Half of the decline they attribute to financial "shocks" starting at the end of 2007.
Well, they got the "financial" part right. But "shocks" doesn't explain anything. And if you want to know what happened and why, you have to go back before 2007. You have to watch the economy develop for 60 years, and watch the growth of finance over that era.
The other half of the decline they attribute to Total Factor Productivity. But as we now know, TFP is just the part of growth that we cannot explain.
1 comment:
Q: "What precipitated the U.S. economy into the worst recession since the Great Depression?"
A: Sixty years of private debt accumulation, applauded and encouraged by policy makers.
Q: "And what headwinds are holding back the recovery?"
A: Failure to reduce private debt.
Q: Surely that is not all?
A: Surely, excessive private debt is the most significant factor.
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