Working Paper: CEPR ID: DP14531
Authors: Valerie Cerra; Antonio Fatas; Sweta Saxena
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 motivate this paradigm shift. The renewed interest in hysteresis has been sparked by the persistence of the Global Financial Crisis, as GDP in advanced economies remains far below the pre-crisis trends. 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.
Keywords: business cycles; growth; hysteresis; macroeconomic policy; persistence; stabilization policy; booms; crises; recovery
JEL Codes: E32; E60; O47
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| GDP levels (P24) | hysteresis (E32) |
| recessions (E32) | permanent losses in output (E23) |
| economic policy responses (E65) | persistence of economic downturns (E32) |
| high-pressure economic conditions (E66) | positive effects on GDP (F69) |
| recessions (E32) | lower long-term growth (O49) |
| economic shocks (F69) | economic performance (P17) |