We present a model of investment hangover motivated by the Great Recession. Overbuilding of durable capital such as housing requires a reallocation of productive resources to other sectors, which is facilitated by a reduction in the interest rate. When monetary policy is constrained, overbuilding induces a demand-driven recession with limited reallocation and low output. Investment in other capital initially declines due to low demand, but it later booms and induces an asymmetric recovery in which the overbuilt sector is left behind. Welfare can be improved by ex post policies that stimulate investment (including in overbuilt capital) and ex ante policies that restrict investment.
"Investment Hangover and the Great Recession."
American Economic Journal: Macroeconomics,
Investment; Capital; Intangible Capital; Capacity
Business Fluctuations; Cycles
Interest Rates: Determination, Term Structure, and Effects
Urban, Rural, Regional, Real Estate, and Transportation Economics: Housing Demand
Housing Supply and Markets