## Hysteresis and Business Cycles

_IMF Working Papers, May 29, 2020_

## Source details

**Canonical URL:** [Hysteresis and Business Cycles](https://www.imf.org/en/publications/wp/issues/2020/05/29/hysteresis-and-business-cycles-49265)

## Other formats

- [Markdown version](/en/publications/wp/issues/2020/05/29/hysteresis-and-business-cycles-49265/index.md)
- [Structured JSON version](/en/publications/wp/issues/2020/05/29/hysteresis-and-business-cycles-49265/index.json)
- [Bundle manifest](/en/publications/wp/issues/2020/05/29/hysteresis-and-business-cycles-49265/bundle-manifest.json)

## Bibliographic details
- Authors: Valerie Cerra, A. Fatas, Sweta Chaman Saxena
- Published: May 29, 2020
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781513536996.001

---

### Summary and motivation
- Traditionally, economic growth and business cycles have been treated independently.
- Hysteresis: dependence of GDP levels on its history of shocks argues for unifying the analysis of growth and cycles.
- 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.

### Findings and conceptual implications
- Recent empirical and theoretical literature reviewed in the paper motivate a paradigm shift linking growth and cycles.
- The findings have far-reaching conceptual implications: temporary shocks can produce persistent effects on GDP levels (hysteresis).
- Specific channels and topics discussed in the literature include:
  - Business cycles
  - Financial crises
  - Labor markets
  - Technology
  - Unemployment
  - Fiscal policy
  - Learning by doing
  - Liquidity trap
  - Physical capital

### Policy implications and recommendations
- In recessions:
  - Monetary and fiscal policies need to be more active to avoid the permanent scars of a downturn.
- In expansions:
  - Running a high-pressure economy could have permanent positive effects.

---

## Content in this bundle

- **Working Paper**
  - [Working Paper (Markdown version)](/-/media/files/publications/wp/2020/english/wpiea2020073-print-pdf.pdf.md){rel="alternate" type="text/markdown"}
  - [Working Paper (PDF)](/-/media/files/publications/wp/2020/english/wpiea2020073-print-pdf.pdf){rel="external" type="application/pdf"}

---

_Source: https://www.imf.org/en/publications/wp/issues/2020/05/29/hysteresis-and-business-cycles-49265_