Recession-Specific Recoveries: L's, U's and Everything in Between

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See all articles by Luiggi Donayre

Luiggi Donayre

University of Minnesota - Duluth

Irina Panovska

University of Texas at Dallas

Date Written: August 27, 2021

Abstract

We relax the assumption that recessions are all alike and propose a new model of output growth that allows for recession-specific recoveries. Output growth is modelled as the weighted average of Markov-switching processes that temporarily alter the level of real GDP (U-shaped) and those with permanent effects (L-shaped), where the recession-specific weight is endogenously estimated. Only the 1969-70 and 2007-09 recessions are characterized exclusively as U and L, respectively. The other 85% of U.S. recessions reflect a weighted combination of the two shapes. Consequently, models that imply only one possible path for a given recession may be insufficient to fully characterize the behavior of output during recessionary periods. With respect to fitting output growth, our model outperforms those that generate either U- or L-shaped recoveries and the model-implied paths closely track the level of actual U.S. real GDP during recessions and recoveries.

Keywords: Business Cycles, Asymmetry, Recovery, Markov-Switching

JEL Classification: C15, C22, E32

Suggested Citation

Donayre, Luiggi and Panovska, Irina, Recession-Specific Recoveries: L's, U's and Everything in Between (August 27, 2021). Available at SSRN: https://ssrn.com/abstract=

Luiggi Donayre

University of Minnesota - Duluth ( email )

1318 Kirby Drive
Duluth, MN 55812
United States
2187268463 (Phone)

Irina Panovska (Contact Author)

University of Texas at Dallas ( email )

2601 North Floyd Road
Richardson, TX 75083
United States

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