Technological Revolutions and the Three Great Slumps: A Medium-Run Analysis

Abstract

The Great Recession, the Great Depression, and the Japanese slump of the 1990s were all preceded by periods of major technological innovation, which happened about 10 years before the start of the decline in economic activity. In an attempt to understand these facts, we estimate a model with noisy news about the future. We find that beliefs about long-run income adjust with an important delay to permanent shifts in productivity. This delay, together with estimated permanent shifts in the three cases, tell a common and simple story for the observed dynamics of productivity and consumption on a 20 to 25 year window. Our analysis highlights the advantages of a look at this data from the point of view of the medium run.

Keywords: Aggregate productivity, Permanent income, Learning

JEL Classification: E21, E27, E32