Hysteresis and fiscal stimulus in a recession

Juha Tervala and Timothy Watson

Journal of International Money and Finance, 2022, vol. 124, issue C

Abstract: The COVID-19 pandemic initiated a deep global recession, and with interest rates at very low levels, warrants consideration of the efficacy of different forms of fiscal stimulus in response. History reveals that deep recessions may cause output and total factor productivity (TFP) hysteresis, a permanent or highly persistent fall in the levels of output and TFP relative to pre-recession trends. This article analyses the output and welfare multipliers of fiscal stimulus during a recession using a macro model with TFP and output hysteresis. We find that transfer payments, public consumption and investment all have high output and welfare multipliers due to their positive effects on TFP in a recessionary environment. However, public investment has the highest output and welfare multipliers, because it has a more positive impact on labour productivity due to the increase in the public capital stock.

Keywords: Covid-19; Fiscal policy; Hysteresis; Recession (search for similar items in EconPapers)
Date: 2022
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Citations: View citations in EconPapers (7)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jimfin:v:124:y:2022:i:c:s0261560622000171

DOI: 10.1016/j.jimonfin.2022.102614

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