Why Has the U.S. Economy Stagnated Since the Great Recession?
42 Pages Posted: 30 Nov 2017 Last revised: 9 Apr 2020
Date Written: April 6, 2020
Since the Great Recession in 2007-09, U.S. real GDP has failed to return to its previously projected path, a phenomenon widely associated with secular stagnation. We investigate whether this stagnation was due to hysteresis effects from the Great Recession, a persistent negative output gap following the recession, or slower trend growth for other reasons. To do so, we develop a new Markov-switching time series model of output growth that accommodates two different types of recessions, those which permanently alter the level of real GDP and those with only temporary effects. We also account for structural change in trend growth. Estimates from our model suggest that the Great Recession generated a large persistent negative output gap rather than any substantial hysteresis effects, with the economy eventually recovering to a lower trend path which appears to be due to a reduction in productivity growth that began prior to the onset of the Great Recession.
Keywords: Secular stagnation; Great Recession; output gap; trend growth; Markov switching; structural breaks
JEL Classification: C22; C51; E32; E37
Suggested Citation: Suggested Citation