The scarring effects of deep contractions

David Aikman, Mathias Drehmann, John Juselius and Xiaochuan Xing

No 1043, BIS Working Papers from Bank for International Settlements

Abstract: We find that deep contractions have highly persistent scarring effects, depressing the level of GDP at least a decade hence. Drawing on a panel of 24 advanced and emerging economies from 1970 to the present, we show that these effects are nonlinear and asymmetric: there is no such persistence following less severe contractions or large expansions. While scarring after financial crises is well known, it also occurred after the deep contractions of the 1970s and 1980s that followed energy price shocks and restrictive monetary policy to combat high inflation. These results are very robust and have important implications for policy making and macro modelling.

Keywords: Hysteresis; nonlinearity; financial crises; monetary policy; oil shocks. (search for similar items in EconPapers)
JEL-codes: E32 E37 G01 (search for similar items in EconPapers)
Pages: 42 pages
Date: 2022-10
New Economics Papers: this item is included in nep-cba and nep-his
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Citations: View citations in EconPapers (12)

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Working Paper: The scarring effects of deep contractions (2022)
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Persistent link: https://EconPapers.repec.org/RePEc:bis:biswps:1043

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