Hysteresis and Business Cycles

By Valerie Cerra, A. Fatas, Sweta Chaman Saxena

May 29, 2020

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Format: Chicago

Valerie Cerra, A. Fatas, and Sweta Chaman Saxena. Hysteresis and Business Cycles, (USA: International Monetary Fund, 2020) accessed November 17, 2024

Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary

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.

Subject: Business cycles, Financial crises, Labor markets, Technology, Unemployment

Keywords: Fiscal policy, Learning by doing, Liquidity trap, Physical capital, WP

Publication Details

Pages:

50
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2020/073
Stock No:

WPIEA2020073
ISBN:

9781513536996
ISSN:

1018-5941

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