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The universal shape of economic recession and recovery after a shock

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Author Info
Damien Challet
Sorin Solomon
Gur Yaari

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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.

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File URL: http://arxiv.org/abs/0802.2004
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File URL: http://arxiv.org/pdf/0802.2004
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Paper provided by arXiv.org in its series Quantitative Finance Papers with number 0802.2004.

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Date of creation: Feb 2008
Date of revision: Aug 2009
Handle: RePEc:arx:papers:0802.2004

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  1. Sachs, Jeffrey D, 1996. "The Transition at Mid Decade," American Economic Review, American Economic Association, vol. 86(2), pages 128-33, May. [Downloadable!] (restricted)
  2. Vladimir Popov, 2007. "Shock Therapy versus Gradualism Reconsidered: Lessons from Transition Economies after 15 Years of Reforms1," Comparative Economic Studies, Palgrave Macmillan Journals, vol. 49(1), pages 1-31, March. [Downloadable!] (restricted)
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  3. Romer, Paul M, 1990. "Endogenous Technological Change," Journal of Political Economy, University of Chicago Press, vol. 98(5), pages S71-102, October. [Downloadable!] (restricted)
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