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| Kevin x.d. Huang, Jie Chen, Zhe Li and Jianfei Sun |
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| ''Financial Conditions and Slow Recoveries'' |
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| 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. |
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| Keywords: Collateral constraint; Financial
shock; Slow recovery; Capital shortage; Extensive margin; Intensive margin |
JEL: E2 - Macroeconomics: Consumption, Saving, Production, Employment, and Investment: General (includes Measurement and Data)
E3 - Prices, Business Fluctuations, and Cycles: General (includes Measurement and Data)
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| Manuscript Received : Jun 08 2014 | | Manuscript Accepted : Jun 16 2014 |
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