Related to the idea of secular stagnation, the level and growth of U.S. real GDP have been much lower than would have been projected prior to the Great Recession. We investigate whether this stagnation is due to particularly large permanent effects of the Great Recession, a large and persistent negative output gap following the recession, or slower trend growth. Using a new Markov-switching time series model that allows a given recession and its recovery to be either U or L shaped and accounts for possible structural breaks in trend growth, we find the Great Recession was U shaped and the economy fully recovered from it by 2014. Instead, the relatively low level and growth of output appears to be driven by a reduction in trend growth that began in 2006 prior to the onset of the Great Recession. Our results help explain a lack of deflation in recent years without having to rely on a change in the slope of the Phillips Curve.


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