Are there recession types, akin to blood types?

It appears so. Reinhart & Rogoff have even written a book about how recoveries are slow after recessions induced by financial crises. Richard Koo has written about balance sheet recessions and how monetary policy effectiveness is weak and fiscal stimulus has to come to the rescue.

On the other hand, Nick Rowe has argued that “recessions are always and everywhere a monetary phenomenon”, i.e. they have all the same origin. How they progress may differ, and depends on how monetary policy acts, but that´s not the same as classifying them by “types”.

In a recent episode of ABC´s This Week, Paul Krugman contested Mary Matlin´s portrayal of the present recovery being the worst ever. In a post today PK illustrates with a chart showing that “financial crisis-type recessions” don´t recover as fast as “normal-type” recessions.

In fact, Mary Matlin was just borrowing Ed Lazear´s image of the worst recovery ever, which he wrote about six months ago:

How many times have we heard that this was the worst recession since the Great Depression? That may be true—although the double-dip recession of the early 1980s was about comparable. Less publicized is that our current recovery pales in comparison with most other recoveries, including the one following the Great Depression.

Bernanke himself has classified the Great Depression as the result of a financial crisis in his classic 1983 AER article “Nonmonetary effects of the financial crisis in the propagation of the Great Depression”.

The next chart shows that 10 quarters into the different recoveries the present one is really by far the worst. The indicator used is nominal GDP (or nominal spending) because that´s what the Fed closely influences. And in both 1933 and 1982 it was monetary policy that made the difference. That´s what´s lacking today.

 

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