Types of Recession

There are five distinct categories of recession, which can be organized based on their underlying causes and characteristics.

Main Categories

• Demand-side recession — occurs when aggregate demand in an economy decreases, often due to high interest rates or reduced consumer spending, as seen in the 2001 recession in the United States, where the dot-com bubble burst led to a decline in consumer spending.
• Supply-side recession — caused by a decrease in aggregate supply, often resulting from natural disasters, wars, or significant increases in production costs, exemplified by the 1973 oil embargo, which led to a supply-side recession in the United States due to soaring oil prices.
• Financial recession — triggered by a financial crisis, such as a banking crisis or a stock market crash, as illustrated by the 2008 global financial crisis, which began with a housing market bubble bursting in the United States and spread globally.
• Government spending recession — results from a reduction in government spending, which can lead to decreased aggregate demand and economic contraction, as observed in the 2013 recession in the United States, where sequestration led to reduced government spending.
• Monetary policy recession — caused by contractionary monetary policies, such as high interest rates or reduced money supply, as seen in the 1981 recession in the United States, where the Federal Reserve, led by Paul Volcker, raised interest rates to combat inflation, resulting in a recession.

Comparison Table

How They Relate

The categories of recession often overlap or feed into each other, and can be commonly confused. For instance, a demand-side recession can lead to a financial recession if decreased aggregate demand leads to business failures and financial instability, as seen in the 2008 global financial crisis, where reduced consumer spending contributed to the housing market bubble bursting. Additionally, a monetary policy recession can lead to a supply-side recession if high interest rates reduce investment and production, as observed in the 1981 US recession, where high interest rates led to reduced business investment. Furthermore, a government spending recession can exacerbate a demand-side recession if reduced government spending further decreases aggregate demand, as seen in the 2013 US recession, where sequestration led to reduced government spending and decreased economic growth. Understanding these relationships is crucial for policymakers to develop effective strategies to mitigate the effects of recessions. Ricardo's comparative advantage model (1817) can provide insights into how economies can recover from recessions by specializing in industries where they have a comparative advantage.