26 July 2014
The analytical methods in growth theory usually involve conservation and reversibility properties. It is then implicitly assumed that economic shocks have no lasting deleterious effects on potential output, despite of the debilitating effects of recessions on bankrupted firms and unemployed workers. This study examines whether and when temporary shocks have permanent effects on
(sustainable) economic growth. This property – temporary shocks having long lasting traces – is called hysteresis.
Hysteresis has severe consequences on public policy. Governments attempt to stabilize economic development by evening out shocks running a deficit with negative and a surplus with positive shocks. However, because of the asymmetric response of the economy, development patterns do not resemble a sine curve: downward responses to shocks are in general stronger than upward responses. Consequently, public debt tend to accumulate: governments fail to pay their debts that accumulate during negative shocks by their surpluses during positive shocks.
Last edited: 04 August 2014
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