Hysteresis and Business Cycles
- (pp. 181-225)
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 motivates this paradigm shift. The renewed interest in hysteresis (or "scarring" in recent parlance) has been sparked by the persistent impact of the global financial crisis—as GDP in advanced economies remained far below the precrisis trends for over a decade—and recent concerns about the lasting impact of the COVID-19 shock. 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.Citation
Cerra, Valerie, Antonio Fatás, and Sweta C. Saxena. 2023. "Hysteresis and Business Cycles." Journal of Economic Literature, 61 (1): 181-225. DOI: 10.1257/jel.20211584Additional Materials
JEL Classification
- E22 Investment; Capital; Intangible Capital; Capacity
- E23 Macroeconomics: Production
- E24 Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
- E32 Business Fluctuations; Cycles
- E63 Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy
- G01 Financial Crises
- O41 One, Two, and Multisector Growth Models