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Accounting for the role of investment frictions in recessions

del Río, Fernando and Lores, Francisco-Xavier (2023): Accounting for the role of investment frictions in recessions.


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We conduct Business Cycle Accounting analyses for both the Euro Area and the United States. If the observed changes in the factor income shares reflect the frictionless competitive adjustment of productive factors, then we find that the capital-efficiency wedge was the main force driving the output growth slowdown during the U.S. Great Recession, with the labour and investment wedges being significant, but secondary forces. The countercyclical evolution of the labour-efficiency wedge helped to mitigate the output growth slowdown. Our results suggest that the investment frictions, which raise the firm's costs of investment, may be the primary cause of the U.S. Great Recession. However, in the U.S. 1982 Recession and the Euro Area Great Recession, the labour-efficiency wedge was the main driving force of the output growth slowdown, with the labour wedge being a significant, but secondary force and the investment wedge being negligible.

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