Tail Risk: Part 2, The Missing Recovery After the Great Recession

Abstract

first declines and then exhibits a sharp rebound toward a stable trend line. Following the Great Recession of 2007-09, however, this rebound is missing; the missing recovery is what some economists call “secular stagnation.”1 For example, Figure 1 shows real gross domestic product (GDP) in the United States. The dashed line is a linear trend that fits data for 1950-2007. In 2015, real GDP was 12 percent below the trend; this is the so-called missing recovery. What caused the missing recovery after the Financial Crisis? In Part 1 of this three-part series, I argued that tail risk increased after the Great Recession; that is, the perceived probability that a large negative shock to the economy would occur increased after the 2007-09 recession. In this Part 2 essay, I discuss how this increase in tail risk can help us understand the missing recovery. Tail Risk: Part 2, The Missing Recovery After the Great Recession