IMF Working Papers

Hysteresis and Business Cycles

By Valerie Cerra, A. Fatas, Sweta Chaman Saxena

May 29, 2020

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Valerie Cerra, A. Fatas, and Sweta Chaman Saxena. Hysteresis and Business Cycles, (USA: International Monetary Fund, 2020) accessed October 11, 2024

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Summary

Traditionally, economic growth and business cycles have been treated independently. However, the dependence of GDP levels on its history of shocks, what economists refer to as “hysteresis,” argues for unifying the analysis of growth and cycles. In this paper, we review the recent empirical and theoretical literature that motivate this paradigm shift. The renewed interest in hysteresis has been sparked by the persistence of the Global Financial Crisis and fears of a slow recovery from the Covid-19 crisis. The findings of the recent literature have far-reaching conceptual and policy implications. In recessions, monetary and fiscal policies need to be more active to avoid the permanent scars of a downturn. And in good times, running a high-pressure economy could have permanent positive effects.

Subject: Business cycles, Financial crises, Labor markets, Technology, Unemployment

Keywords: Fiscal policy, Learning by doing, Liquidity trap, Physical capital, WP

Publication Details

  • Pages:

    50

  • Volume:

    ---

  • DOI:

    ---

  • Issue:

    ---

  • Series:

    Working Paper No. 2020/073

  • Stock No:

    WPIEA2020073

  • ISBN:

    9781513536996

  • ISSN:

    1018-5941