Are Recoveries all the Same: GDP and TFP?*
| Published date | 01 October 2021 |
| Author | Sui Luo,Yu‐Fan Huang,Richard Startz |
| Date | 01 October 2021 |
| DOI | http://doi.org/10.1111/obes.12439 |
Are Recoveries all the Same: GDP and TFP?*
SUI LUO,†YU-FAN HUANG†and RICHARD STARTZ‡
†International School of Economics and Management, Capital University of Economics and
Business, Beijing, China (e-mail: suiluocueb@cueb.edu.cn; yufanh@cueb.edu.cn)
‡Department of Economics, University of California, Santa Barbara, California, USA (e-mail:
startz@ucsb.edu)
Abstract
Recessions and subsequent recoveries are frequently classified as ‘L-shaped’or ‘U-
shaped’, with output losses in the former being permanent and losses in the latter at
least partially made up by higher than average growth during the recovery. We
estimate the probability of a U-shaped recovery for postwar NBER recessions. Most
earlier recessions were U-shaped but more recent recessions have been L-shaped. The
shape of recoveries is tracked relatively well by durable consumption, investment,
labour hours and employment. Posterior probabilities for the shape of recoveries for
nondurable consumption and participation rate are less decisive. However, total factor
productivity appears to recover rapidly after all recessions.
I. Introduction
Whether, or the extent to which, recoveries following recessions return output to trend
is of central interest to both policymakers and to the academic study of business
cycles. Friedman (1993) suggested the ‘plucking model’, arguing that growth following
recessions is unusually high. Researchers, notably Kim, Morley and Piger (2005),
Morley and Piger (2012), and Eo and Morley (2020) have done extensive work asking
whether the typical recession is followed by a high-speed recovery, answering the
question in the affirmative. (For more on recoveries following recessions, see also
Beaudry and Koop, 1993; Kim and Nelson, 1999; Kim and Murray, 2002.) We
eschew the idea of a universal recovery pattern in favour of a framework in which
different recoveries can have different shapes. Specifically, we attempt to identify the
shape of each of the 11 NBER recoveries in post-WWII US history, excluding the
Covid recession, for which a recovery had not begun at the time of this writing.
1
We are motivated by the observation that postrecession growth paths seem to vary
a great deal across different recessions. The left panel of Figure 1 plots the real GDP
path relative to its precrisis level in the 4-year window after the recession starts for all
JEL Classification numbers:E3, E37, C11.
*We are grateful to the editor Jonathan Temple and to two referees for extensive and helpful comments. Luo
acknowledges support from National Natural Science Foundation of China under grant 72003137.
1
We identify the shape of a recovery based on observations on the full recovery phase.
1111
©2021 The Department of Economics, University of Oxford and John Wiley & Sons Ltd
OXFORD BULLETIN OF ECONOMICS AND STATISTICS, 83, 5 (2021) 0305-9049
doi: 10.1111/obes.12439
11 postwar recessions. Following some recessions, especially the Great Recession
starting in late 2007, the economy seems to recover much more slowly than for others.
In this paper, these postrecession periods are labelled as either ‘L-shaped’recoveries or
as ‘U-shaped’recoveries. A simple illustration of the differences between the two
types is presented in the right panel of Figure 1, with formal models established in
Section II. In an L-shaped recovery the growth rate is re-established but output is
permanently below its prerecession trend. In contrast, in a U-shaped recovery, output
returns at least part way towards where it would have been absent a recession. In what
follows, we estimate empirically that a two-quarter recession followed by an L-shaped
recovery has an average permanent loss of GDP of 3 per cent. In contrast, the
permanent loss following a U-shaped recovery is about 0.75 per cent.
We apply our method to postwar US real GDP and the factors determining real
GDP, which can be broken down as consumption, investment, government spending,
exports and imports, on the one hand, and total factor productivity (TFP), labour hours
and the capital stock (plus natural resources, etc.). These factors are known well to be
cyclical, that is, moving up and down with real GDP over the business cycle.
However, little is known about whether these factors share the same shape of recovery,
if any, as real GDP. We hope that setting out more detailed economic stylized facts
should guide future theoretical models.
As a preview of our results, we find four stylized facts, which can be summarized
briefly as follows. We identify some recoveries as U-shaped while others are identified
as L-shaped –notably the more recent recessions. We also establish that recovery
shapes are not uniform across sectors of the economy. Perhaps most interestingly, we
find that total factor productivity has U-shaped recoveries even during L-shaped GDP
recoveries –afinding at odds with some ideas about real business cycles.
The first stylized fact is that recoveries from recent recessions are quite different
from recoveries in earlier decades. We find significant evidence for the existence of U-
shaped recoveries, as have others. However, we find a high probability for U-shaped
recoveries for only some of the earlier recessions. The recent three recoveries are very
time
0510 15 20 25 30
-6
-4
-2
0
2
4
6
8
10
12
14 L-shaped
U-shaped
No recession
Number of quarters after beginning of recession
13579111315
% change in log GDP relative to the peak
-5
0
5
10
15
20
25
Great Recession
Figure 1. L- and U-shaped recoveries
©2021 The Department of Economics, University of Oxford and John Wiley & Sons Ltd
1112 Bulletin
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