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The universal shape of economic recession and recovery after a shock

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  • Challet, Damien
  • Solomon, Sorin
  • Yaari, Gur

Abstract

We show that a simple and intuitive three-parameter equation fits remarkably well the evolution of the gross domestic product (GDP) in current and constant dollars of many countries during times of recession and recovery. We then argue that this equation is the response function of the economy to isolated shocks, hence that it can be used to detect large and small shocks, including those which do not lead to a recession; we also discuss its predictive power. Finally, a two-sector toy model of recession and recovery illustrates how the severity and length of recession depends on the dynamics of transfer rate between the growing and failing parts of the economy.

Suggested Citation

  • Challet, Damien & Solomon, Sorin & Yaari, Gur, 2009. "The universal shape of economic recession and recovery after a shock," Economics - The Open-Access, Open-Assessment E-Journal (2007-2020), Kiel Institute for the World Economy (IfW Kiel), vol. 3, pages 1-24.
    • Handle: RePEc:zbw:ifweej:200936
    DOI: 10.5018/economics-ejournal.ja.2009-36
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    References listed on IDEAS

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    1. Stanley Fischer & Ratna Sahay, 2000. "The Transition Economies After Ten Years," NBER Working Papers 7664, National Bureau of Economic Research, Inc.
    2. G. Yaari & A. Nowak & K. Rakocy & S. Solomon, 2008. "Microscopic study reveals the singular origins of growth," The European Physical Journal B: Condensed Matter and Complex Systems, Springer;EDP Sciences, vol. 62(4), pages 505-513, April.
    3. Sachs, Jeffrey D, 1996. "The Transition at Mid Decade," American Economic Review, American Economic Association, vol. 86(2), pages 128-133, May.
    4. Vladimir Popov, 2007. "Shock Therapy versus Gradualism Reconsidered: Lessons from Transition Economies after 15 Years of Reforms1," Comparative Economic Studies, Palgrave Macmillan;Association for Comparative Economic Studies, vol. 49(1), pages 1-31, March.
    5. Solow, Robert M., 2000. "Growth Theory: An Exposition," OUP Catalogue, Oxford University Press, edition 2, number 9780195109030.
    6. Gur Yaari & Andrzej Nowak & Kamil Rakocy & Sorin Solomon, 2008. "Microscopic Study Reveals the Singular Origins of Growth," Papers 0803.2201, arXiv.org.
    7. Polterovich, Victor & Popov, Vladimir, 2006. "Эволюционная Теория Экономической Политики: Часть I: Опыт Быстрого Развития [An Evolutionary Theory of Economic Policy: Part I: The Experience of Fast Development]," MPRA Paper 22168, University Library of Munich, Germany.
    8. Kolodko, Grzegorz W., 2000. "From Shock to Therapy: The Political Economy of Postsocialist Transformation," OUP Catalogue, Oxford University Press, number 9780198297437.
    9. Vladimir Popov, 2006. "Shock Therapy Versus Gradualism Reconsidered: Lessons From Transition Economies After 15 Years Of Reforms," Working Papers w0068, New Economic School (NES).
    10. Mr. Stanley Fischer & Ms. Ratna Sahay, 2000. "The Transition Economies After Ten Years," IMF Working Papers 2000/030, International Monetary Fund.
    11. Lucas, Robert E, Jr, 1990. "Supply-Side Economics: An Analytical Review," Oxford Economic Papers, Oxford University Press, vol. 42(2), pages 293-316, April.
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    Cited by:

    1. Sorin Solomon & Nataša Golo, 2015. "Microeconomic structure determines macroeconomic dynamics: Aoki defeats the representative agent," Journal of Economic Interaction and Coordination, Springer;Society for Economic Science with Heterogeneous Interacting Agents, vol. 10(1), pages 5-30, April.
    2. dos Santos, Renato Vieira & da Silva, Linaena Méricy, 2015. "Discreteness induced extinction," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 438(C), pages 17-25.
    3. Natasa Golo & Guy Kelman & David S. Bree & Leanne Usher & Marco Lamieri & Sorin Solomon, 2015. "Many-to-one contagion of economic growth rate across trade credit network of firms," Papers 1506.01734, arXiv.org.
    4. Popov, Vladimir, 2020. "How to Deal with a Coronavirus Economic Recession?," MPRA Paper 100485, University Library of Munich, Germany.
    5. Betarelli Junior, Admir Antonio & Faria, Weslem Rodrigues & Proque, Andressa Lemes & Perobelli, Fernando Salgueiro & de Almeida Vale, Vinicius, 2021. "COVID-19, public agglomerations and economic effects: Assessing the recovery time of passenger transport services in Brazil," Transport Policy, Elsevier, vol. 110(C), pages 254-272.

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    More about this item

    Keywords

    Economic growth; GDP; shocks; response function; modelling; prediction; optimal policy;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • O23 - Economic Development, Innovation, Technological Change, and Growth - - Development Planning and Policy - - - Fiscal and Monetary Policy in Development
    • O41 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - One, Two, and Multisector Growth Models

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