Abstract
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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