Accounting for the slowdown in output growth after the Great Recession: A wealth preference approach

Abstract Previous studies have argued that US output growth declined persistently after the Great Recession. To explain the persistent slowdown in output growth, we develop a simple model that incorporates wealth preferences and downward nominal wage rigidity into a standard monetary growth model. Our model predicts that output initially grows at a constant steady rate and slows endogenously afterward. In the model, persistent stagnation occurs together with the declining real interest rate. Applying our model to the US data, we show that it successfully explains the slowdown in output growth along with the declines in the real interest rate. We also examine the model with the Japanese data. The model replicates the persistent stagnation that has been observed since the 1990s. JEL Classification: E41, E47, O10