IMF Working Papers

Booms, Crises, and Recoveries: A New Paradigm of the Business Cycle and its Policy Implications

By Valerie Cerra, Sweta Chaman Saxena

November 16, 2017

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Valerie Cerra, and Sweta Chaman Saxena. Booms, Crises, and Recoveries: A New Paradigm of the Business Cycle and its Policy Implications, (USA: International Monetary Fund, 2017) accessed November 4, 2024

Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary

All types of recessions, on average, not just those associated with financial and political crises (as in Cerra and Saxena, AER 2008), lead to permanent output losses. These findings have far-reaching conceptual and policy implications. A new paradigm of the business cycle needs to account for shifts in trend output and the puzzling inconsistency of output dynamics with other cyclical components of production. The ‘output gap’ can be ill-conceived, poorly measured, and inconsistent over time. Persistent losses require more buffers and crisis-avoidance policies, affecting tradeoffs in prudential, macroeconomic, and reserve management policies. The frequency and depth of crises are key determinants of long-term growth and drive a new stylized model of economic development.

Subject: Banking crises, Business cycles, Economic growth, Financial crises, Inflation, Output gap, Potential output, Production

Keywords: Banking crises, Banking recession, Booms, Business cycle, Business cycles, Crises, Crisis, Debt-crisis legacy, Development, Economic development, Financial crisis, Fiscal policy, Foreign reserves, Global, Global Financial Crisis, Growth, Macro-prudential policy, Monetary policy, Output gap, Output gap estimate, Output gap in the recession, Output gaps in the United States, Output loss, Potential output, Recession, Recession consist, Recession period, Recession year, Recoveries, Shift aggregate, WP

Publication Details

  • Pages:

    31

  • Volume:

    ---

  • DOI:

    ---

  • Issue:

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  • Series:

    Working Paper No. 2017/250

  • Stock No:

    WPIEA2017250

  • ISBN:

    9781484325759

  • ISSN:

    1018-5941