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Memory of Recessions

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Author Info

  • Cross, R.
  • McNamara, H.
  • Pokrovskii, A.V.

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.

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File URL: http://repo.sire.ac.uk/handle/10943/171
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Bibliographic Info

Paper provided by Scottish Institute for Research in Economics (SIRE) in its series SIRE Discussion Papers with number 2010-40.

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Date of creation: 2010
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Handle: RePEc:edn:sirdps:171

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Related research

Keywords: Recessions; Permanent Effects; Hydraulic Keynesianism; Porous Media; Hysteresis;

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