Hysteresis and Business Cycles

Valerie Cerra, Antonio Fatas and Sweta Saxena

No 2020/073, IMF Working Papers from International Monetary Fund

Abstract: 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.

Keywords: WP; fiscal policy; learning by doing; physical capital; liquidity trap (search for similar items in EconPapers)
Pages: 50
Date: 2020-05-29
New Economics Papers: this item is included in nep-mac and nep-pke
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Citations: View citations in EconPapers (15)

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Related works:
Journal Article: Hysteresis and Business Cycles (2023)
Working Paper: Hysteresis and Business Cycles (2020)
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Persistent link: https://EconPapers.repec.org/RePEc:imf:imfwpa:2020/073

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