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@UCDavisEcon Jorda, Taylor define the 'long run' for macroeconomists

Work by Professors Oscar Jorda and Alan Taylor has prompted macroeconomists to rethink their long-run views of debt build-ups, and the impact of monetary policy on asset prices.

In contrast to common assumptions, in joint work with coauthors Martin Kornejew and Moritz Schularck covered by the Financial Times, Jorda and Taylor find that recessions following big corporate debt build-ups are no deeper or longer than other recessions, as is the case for debt build-ups by households. As an explanation, they conjecture that corporate debt and restructuring is much more rapid and efficient than processes for other types of debt. The results have non-trivial implications for policy responses during recessions preceded by different types of booms.

During an era where many are questioning whether monetary stimulus presents undue problems by provoking rapid increases in asset prices, Jorda and Taylor (in joint work also with Schularick) show that housing prices are not highly sensitive to monetary policy relative to incomes. As the Financial Times reports, they found that a 1 per cent rise in interest rates (which is large by monetary policy standards) reduces the ratio of house prices only slightly compared to incomes.