Hysteresis and Business Cycles

51 Pages Posted: 8 May 2020

See all articles by Valerie Cerra

Valerie Cerra

International Monetary Fund (IMF)

Antonio Fatás

INSEAD; Centre for Economic Policy Research (CEPR); ABFER

Sweta Saxena

affiliation not provided to SSRN

Multiple version iconThere are 2 versions of this paper

Date Written: March 2020


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: Booms, business cycles, Crises, growth, hysteresis, Macroeconomic Policy, Persistence, recovery, Stabilization Policy

JEL Classification: E32, E60, O47

Suggested Citation

Cerra, Valerie and Fatas, Antonio and Saxena, Sweta, Hysteresis and Business Cycles (March 2020). CEPR Discussion Paper No. DP14531, Available at SSRN: https://ssrn.com/abstract=3594152

Valerie Cerra (Contact Author)

International Monetary Fund (IMF) ( email )

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Antonio Fatas

INSEAD ( email )

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Centre for Economic Policy Research (CEPR)

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Sweta Saxena

affiliation not provided to SSRN

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