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Financial Conditions and Slow Recoveries

Author

Listed:
  • Kevin x.d. Huang

    (Vanderbilt University)

  • Jie Chen

    (Shanghai University of Finance and Economics)

  • Zhe Li

    (Shanghai University of Finance and Economics)

  • Jianfei Sun

    (Shanghai Jiao Tong University)

Abstract
We argue that financial frictions and financial shocks can be an important factor behind the slow recoveries from the three most recent recessions. To illustrate this point, we augment a simple RBC model with a collateral constraint whose tightness is randomly disturbed by a shock that prescribes the general financial condition in the economy. We present evidence that such financial shock has become more persistent since the mid 1980s. We show that this can be an important contributor to the recent slow recoveries, and that a main mechanism may have to do with just-in-time-uses of capital and labor in the face of tight credit conditions during the recoveries. To assess the importance of such financial shock relative to other shocks in contributing to the slow recoveries, we enrich a New Keynesian model, which features various structural shocks and frictions widely considered in the literature, with the financial frictions and financial shocks studied in our parsimonious model. Our structural estimates of this comprehensive model indicate that financial shocks can play a dominant role in accounting for the slow recoveries, especially in employment growth rate.

Suggested Citation

  • Kevin x.d. Huang & Jie Chen & Zhe Li & Jianfei Sun, 2014. "Financial Conditions and Slow Recoveries," Vanderbilt University Department of Economics Working Papers 14-00004, Vanderbilt University Department of Economics.
    • Handle: RePEc:van:wpaper:vuecon-14-00004
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    File URL: http://www.accessecon.com/pubs/VUECON/VUECON-14-00004.pdf
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    References listed on IDEAS

    as
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    Cited by:

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    2. Karwowski, Mariusz, 2016. "The risk in using financial reports in the study of airline business models," Journal of Air Transport Management, Elsevier, vol. 55(C), pages 185-192.
    3. Roberta Cardani & Alessia Paccagnini & Stefania Villa, 2015. "Forecasting in a DSGE Model with Banking Intermediation: Evidence from the US," Working Papers 292, University of Milano-Bicocca, Department of Economics, revised Feb 2015.

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    More about this item

    Keywords

    Collateral constraint; Financial shock; Slow recovery; Capital shortage; Extensive margin; Intensive margin;
    All these keywords.

    JEL classification:

    • E2 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment
    • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles

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