The Scarring and Hysteresis Effects of Steep Recessions and the Implications for Fiscal Policy in ECA Transition EMDEs

Martin Brownbridge and Roy S. Canagarajah

No 9682, Policy Research Working Paper Series from The World Bank

Abstract: The deep recession in many of the emerging market transition economies of Europe and Central Asia caused by the COVID-19 crisis has raised fears of long-term damage to potential output through scarring and hysteresis. These economies were also hit hard by the great recession caused by the global financial crisis. This paper provides empirical estimates of the impact of the great recession on the subsequent medium-term level of real gross domestic product in a sample of 65 middle-income countries. It finds evidence of a significant hysteresis parameter in these countries. The paper also examines how the combination of a hysteresis parameter and a positive fiscal multiplier can mean that a countercyclical fiscal expansion that successfully mitigates the output loss in a recession need not worsen public debt levels in the medium to long term because of its positive impact on potential output and thus the tax base.

Keywords: Economic Adjustment and Lending; Macro-Fiscal Policy; Public Finance Decentralization and Poverty Reduction; Public Sector Economics; Macroeconomics and Economic Growth; Economic Policy; Institutions and Governance; Fiscal&Monetary Policy; International Trade and Trade Rules (search for similar items in EconPapers)
Date: 2021-06-01
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Citations: View citations in EconPapers (1)

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