Professor José-Víctor Ríos-Rull, from the University of Minnesota and the Minneapolis FED, delivered the Inaugural Macroeconomics, Growth and History Centre (MaGHiC) Lecture on Friday 16 January. He presented his work with Huo Zhen on ‘Financial Frictions, Asset Prices, and the Great Recession‘.
The Great Recession that most western economies faced from 2008 was unusual in that it represented the largest drop of economic activity since the Great Depression of the 1930s. The loss of output, employment, productivity and house values during the period was of an order of magnitude many times larger than standard recessions.
Professor Rios-Rull addressed a question on whether a financial shock in macroeconomic models can reproduce such a large slump. This financial shock comes in the form of tightening lending standards by banks. The answer to the question is ‘yes’: a quantitative assessment of a model with financial imperfections, and where demand can contribute to productivity fluctuations, demonstrated that we can generate such a large decline in economic activity even with a modest tightening of lending standards by banks.
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