Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/236649 
Year of Publication: 
2021
Series/Report no.: 
CESifo Working Paper No. 9107
Publisher: 
Center for Economic Studies and Ifo Institute (CESifo), Munich
Abstract: 
We propose a theoretical framework to reconcile episodes of V-shaped and L-shaped recovery, encompassing the behaviour of the U.S. economy before and after the Great Recession. In a DSGE model with endogenous growth, negative demand shocks destroy productive capacity, moving GDP to a lower trajectory. A Taylor rule policy designed to reduce the output gap may counterbalance the shocks, preventing the destruction of economic capacity and inducing a V-shaped recovery. However, when shocks are deep and persistent enough, like during the Great Recession, they call for a downward revision of potential output measures, the so-called switching-track, weakening the recovering role of monetary policy and inducing an L-shaped recovery. When calibrated to the U.S. economy, the model replicates well the L-shaped recovery and switching-track that followed the Great Recession, as well as the V-shaped recoveries that followed the oil shock recessions.
Subjects: 
Great Recession
economic recovery
endogenous growth
hysteresis
trend shift
switching-track
supply destruction prevention
economic capacity
monetary policy
JEL: 
E12
E22
E32
O41
E52
Document Type: 
Working Paper
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