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Project Description

Summary:  View help for Summary We present a model of investment hangover motivated by the Great Recession. Overbuilding of durable capital such as housing requires a reallocation of productive resources to other sectors, which is facilitated by a reduction in the interest rate. When monetary policy is constrained, overbuilding induces a demand-driven recession with limited reallocation and low output. Investment in other capital initially declines due to low demand, but it later booms and induces an asymmetric recovery in which the overbuilt sector is left behind. Welfare can be improved by ex post policies that stimulate investment (including in overbuilt capital) and ex ante policies that restrict investment.

Scope of Project

JEL Classification:  View help for JEL Classification
      E22 Investment; Capital; Intangible Capital; Capacity
      E23 Macroeconomics: Production
      E32 Business Fluctuations; Cycles
      E43 Interest Rates: Determination, Term Structure, and Effects
      E52 Monetary Policy
      R21 Urban, Rural, Regional, Real Estate, and Transportation Economics: Housing Demand
      R31 Housing Supply and Markets


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