Kiel Working Papers, Kiel Institute for World Economics
No 1815:
Do large recessions reduce output permanently?
Mehdi Hosseinkouchack and Maik Wolters
Abstract: The slow recovery following the 2008/2009 recession has
led to renewed interest in the question whether deep recessions lower real
GDP permanently or whether we can expect a rebound to earlier trend levels.
Using a recent quantile autoregression unit root test we check whether
shocks to real GDP have permanent or temporary effects. In contrast to
earlier studies this approach takes into account that the transmission of a
shock might depend on the sign and the size of the shock. Large
recessionary shocks might have a different effect than smaller recessionary
or expansionary shocks. We do not only test the unit root hypothesis at the
conditional mean of GDP, but also in the tails of the distribution where
the lower tail corresponds to large recessions. The test has more power
than conventional unit root tests. We find that positive and negative
shocks including large recessionary shocks have permanent effects on
output. Therefore, a rebound of GDP to its pre-crisis trend level is
unlikely. Current output gap estimates based on deterministic trends are
likely to be too negative and inflation forecasts based on these are likely
to be too low
Keywords: unit root tests, quantile autoregression, GDP, recessions, asymmetries; (follow links to similar papers)
JEL-Codes: C22,; E32,; O40; (follow links to similar papers)
16 pages, December 2012
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