Abstract
This paper presents a Neo-Fisherite theory of recession. Mainly, the paper deals with the case where output decline is caused by a one-period factor that is non-existent for other periods and pins the output for that period to a particular value. The paper assumes an economy where technology follows the trend without any deviation and there exists no wage and price stickiness. Households are assumed to follow consumption Euler equation, meaning that households remain as perfect rational agents. The paper concludes that to make an economy go back to zero output gap, real interest rate has to be raised before being restored to natural rate of interest, implying a Neo-Fisherite conclusion.
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