Hysteresis and Business Cycles

Valerie Cerra, Antonio Fatas and Sweta C. Saxena

Journal of Economic Literature, 2023, vol. 61, issue 1, 181-225

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 motivates this paradigm shift. The renewed interest in hysteresis (or "scarring" in recent parlance) has been sparked by the persistent impact of the global financial crisis—as GDP in advanced economies remained far below the precrisis trends for over a decade—and recent concerns about the lasting impact of the COVID-19 shock. 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.

JEL-codes: E22 E23 E24 E32 E63 G01 O41 (search for similar items in EconPapers)
Date: 2023
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Citations: View citations in EconPapers (26)

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Working Paper: Hysteresis and Business Cycles (2020)
Working Paper: Hysteresis and Business Cycles (2020)
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DOI: 10.1257/jel.20211584

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