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 modeled 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, suggesting multiple sources of recessions. 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.
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Helpful comments from an anonymous referee, Adam Check, Farzaneh Davarzani, Yunjong Eo, James Morley, Dick Startz and the participants at the 2021 IAES European Conference, the 2021 Annual WEAI Conference, the 2021 MERG Conference and the University of Minnesota - Duluth Research Colloquium are gratefully acknowledged. All errors are our own.
© 2021 Elsevier B.V.
- Business cycles