Hysteresis and Business Cycles

Traditionally, economic growth and business cycles have been treated independently. However, the dependence of GDP levels on its history shocks, what economists refer to as “hysteresis,” argues for unifying analysis cycles. In this paper, we review recent empirical theoretical literature that motivates paradigm shift. The renewed interest in hysteresis (or “scarring” parlance) has sparked by persistent impact global financial crisis —as advanced economies remained far below precrisis trends over a decade—and concerns about lasting COVID-19 shock. findings far-reaching conceptual policy implications. recessions, monetary fiscal policies need be more active avoid permanent scars downturn. And good times, running high-pressure economy could positive effects. (JEL E22, E23, E24, E32, E63, G01, O41)