Wednesday, December 9, 2009

What Happens Next? Part II

I have now run my version of the real business cycle model (some of my academic papers on it are here and here, and I began applying it to this recession about a year ago, such as here and here) for a partial recovery over the next two years. (compare to my previous post of no recovery -- they can look pretty similar, depending on what people expect about the future of productivity growth).

My model has no adverse productivity shocks, no shocks to capital markets (these variables just react to events in the labor market), no monetary policy, and no fiscal stimulus. Simply put: I view this as a one (type of) shock recession, and the labor market is ground zero for that shock.

This version of the model has a labor market distortion that gets progressively worse for two years (2008 & 2009), at which point it partly reverses itself, although never getting back to pre-recession levels.

The model and data are shown below. Note that latest 12 months (4 quarters) of the data were not available when I first began writing about this model.

[APL is real GDP per hour worked -- labor productivity -- which in the model is in fixed proportions to the marginal product of labor]

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