Hysteresis and Business Cycles

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 and fears of a slow recovery from the Covid-19 crisis. 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: Economic forecasting, Economic theory, Supply and demand, Business cycles, Economic policy, growth, hysteresis, economic model, macroeconomic policy, persistence, stabilization policy, macroeconomy, booms, crises, recovery, covid, pandemic, WP, technology shock, business cycle

JEL Classification: E32, E60, O30, O47, E01, E2, O4, G21, D4