Hysteresis and Business Cycles

Author/Editor:

Valerie Cerra ; A. Fatas ; Sweta Chaman Saxena

Publication Date:

May 29, 2020

Electronic Access:

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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.

Series:

Working Paper No. 20/73

Subject:

English

Publication Date:

May 29, 2020

ISBN/ISSN:

9781513536996/1018-5941

Stock No:

WPIEA2020073

Format:

Paper

Pages:

50

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