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. Forthcoming in: Economica : pp. 30-41.

Abstract

Our Business Cycle Accounting exercise reveals that both capital and investment efficiency declines played a prominent role in accounting for the output downturn during the U.S. Great Recession. The evidence indicates that an increase in firms’ investment costs may have played a substantial role during the U.S. Great recession consistent with business cycle models in which firms face financial frictions. The negligible role played by the TFP decline in accounting for the output downturn during the U.S. Great Recession found by previous works can be explained by the movement in opposite directions of both the labour and capital efficiency. However, we find that labour efficiency falling was the main force driving output downturn in the 1982 Recession and the Euro Area Great Recession.

• Item Type: MPRA Paper
• Language: English
• Keywords: Business Cycle Accounting, Capital-Efficiency Wedge, Labour-Efficiency Wedge, Labour Wedge, Investment Wedge, Resource Constraint Wedge, Productivity, Labour Share, Hours Worked, Great Recession.
• Subjects: E - Macroeconomics and Monetary Economics > E1 - General Aggregative Models > E13 - Neoclassical; E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles > E32 - Business Fluctuations ; Cycles; O - Economic Development, Innovation, Technological Change, and Growth > O4 - Economic Growth and Aggregate Productivity > O40 - General

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