Abstract
•The three “Slumps” were preceded by periods of major technological innovation.•We estimate a model with noisy news using data from these three episodes.•Beliefs about the long run adjust to permanent shifts in productivity with a delay.•This implies similar productivity and consumption dynamics on a 20 to 25 year window.•We emphasize a look at this data from the point of view of the medium run.
The Great Recession, the Great Depression, and the Japanese Slump of the 1990s were all preceded by periods of major technological innovation, which happened about 10 years before the start of the decline in economic activity. We estimate a model with noisy news. We find that beliefs about long-run income adjust to permanent shifts in productivity with an important delay. The estimation tells a common and simple story for the observed dynamics of productivity and consumption on a 20 to 25 year window. Our analysis highlights the advantages of a look at this data from the point of view of the medium run.
