Hysteresis and Business Cycles
Sweta C. Saxena
Journal of Economic Literature
no. 1, March 2023
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.
Cerra, Valerie, Antonio Fatás, and Sweta C. Saxena.
"Hysteresis and Business Cycles."
Journal of Economic Literature,
Investment; Capital; Intangible Capital; Capacity
Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
Business Fluctuations; Cycles
Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy
One, Two, and Multisector Growth Models