Why Are Some Recoveries Weak and Others Strong?

Title: Why Are Some Recoveries Weak and Others Strong?

Abstract: The recoveries from the 1990-1, 2001, and 2007-9 recessions have been weak relative to other postwar business cycles. We show this is also true in the cross-section. Leveraging heterogeneous exposure to the national business cycle across U.S. States, we estimate the cross-sectional recovery elasticity with respect to the recession depth. For the 1990-1, 2001, and 2007-9 recessions we estimate a positive recovery elasticity so that relatively larger recession in the cross-sections is followed by a relatively weaker recovery. For the other postwar recessions we estimate a recovery elasticity close to -1 so the recovery compensates exactly for the larger recession. Our cross-sectional estimates are consistent with these recessions being caused by different shocks. Boom-bust cycles give rise to positive recovery elasticities and intertemporal shocks, such as monetary policy shocks, to recovery elasticities of -1. Our cross-sectional estimates are not consistent with models of hysteresis or tight monetary policy, and thus help discipline explanations for why some recoveries are weak and others are not.