Memory of Recessions

Rod Cross, Hugh McNamara, Alexei Pokrovskii

Research output: Working paperDiscussion paper

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Abstract

This paper reviews the evidence on the effects of recessions on potential output. In contrast to the assumption in mainstream macroeconomic models that economic fluctuations do not change potential output paths, the evidence is that they do in the case of recessions. A model is proposed to explain this phenomenon, based on an analogy with water flows in porous media. Because of the discrete adjustments made by heterogeneous economic agents in such a world, potential output displays hysteresis with regard to aggregate demand shocks, and thus retains a memory of the shocks associated with recessions.
Original languageEnglish
Place of PublicationGlasgow
PublisherUniversity of Strathclyde
Pages1-25
Number of pages26
Volume10
Publication statusPublished - 15 Mar 2010

Keywords

  • recessions
  • permanent effects
  • hydraulic keynesianism
  • porous media
  • hysteresis

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    Cross, R., McNamara, H., & Pokrovskii, A. (2010). Memory of Recessions. (09 ed.) (pp. 1-25). Glasgow: University of Strathclyde.