Discussion

The authors started by thanking both discussants. They agreed with Robert Hall’s assessment that the paper contains two distinct parts but slightly disagreed on their characterization. They viewed the first part as proposing a mechanism for the propagation of a financial crisis and its effect on interest rates. The second part proposes a mechanism for the endogenous persistence of financial crises. The authors clarified that their paper focuses on persistence, whereas both discussants mostly focused on propagation. The authors argued that they opted for a simple yet quantitatively realistic propagation mechanism based on liquidity constraints. Their emphasis is on a novel persistence mechanism and its ability to explain a decrease in riskless interest rates over an extended period of time. Their persistence mechanism relies solely on agents not knowing the true distribution of shocks and estimating it over time. GregoryMankiw spoke next and asked the authors why they focused specifically on the recent financial crisis instead of taking amore general approach. He suggested that they could study other related episodes, including the Great Depression and the Great Moderation. Several participants proposed alternative approaches to validate the authors’mechanism.GitaGopinath suggested lookingatdisasters in emergingmarkets. Valerie Ramey recommended investigating the response of land prices to earthquakes. Emmanuel Farhi proposed studying a broader class of assets and analyzing whether their behavior is consistent with the prediction of the authors’ theory. He suggested looking into the cross-section of stocks and exchange rates during and following the Great Recession. The authors were sympathetic to these suggestions. They explained that they could not extend their analysis to the Great Depression due to data limitations. Mankiw pointed out that real rates have decreased over time since the Great Depression, whereas the authors’ persistence mechanism would