Memory of recessions

Rod Cross, Hugh McNamara and Alexei Pokrovskii

Journal of Post Keynesian Economics, 2012, vol. 34, issue 3, 413-430

Abstract: This paper reviews the evidence on the effects of recessions on potential output. In contrast to the assumption in mainstream macroeconomic models that economic fluctuations do not change potential output paths, the evidence is that they do in the case of recessions. A model is proposed to explain this phenomenon based on an analogy with water flows in porous media. Because of the discrete adjustments made by heterogeneous economic agents in such a world, potential output displays hysteresis with regard to aggregate demand shocks and thus retains a memory of the shocks associated with recessions.

Date: 2012
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Related works:
Working Paper: Memory of Recessions (2010)
Working Paper: Memory of recessions (2010)
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Persistent link: https://EconPapers.repec.org/RePEc:mes:postke:v:34:y:2012:i:3:p:413-430

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DOI: 10.2753/PKE0160-3477340302

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