Citation

Discussion Paper Details

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Title: Hysteresis and Business Cycles

Author(s): Valerie Cerra, Antonio Fat�s and Sweta Saxena

Publication Date: March 2020

Keyword(s): Booms, business cycles, Crises, growth, hysteresis, Macroeconomic Policy, Persistence, recovery and Stabilization Policy

Programme Area(s): International Macroeconomics and Finance and Macroeconomics and Growth

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.

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Bibliographic Reference

Cerra, V, Fat�s, A and Saxena, S. 2020. 'Hysteresis and Business Cycles'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=14531