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Memory of recessions

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Author Info

  • Rod Cross

    ()
    (Department of Economics, University of Strathclyde)

  • Hugh McNamara

    ()
    (Department of applied mathematics, University cork College, Ireland)

  • Alexei Pokrovskii

    ()
    (Department of applied mathematics, University cork College, Ireland)

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 inporous 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://www.strath.ac.uk/media/departments/economics/researchdiscussionpapers/2010/10-09_final.pdf
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Bibliographic Info

Paper provided by University of Strathclyde Business School, Department of Economics in its series Working Papers with number 1009.

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Length: 25 pages
Date of creation: Mar 2010
Date of revision:
Handle: RePEc:str:wpaper:1009

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Related research

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

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Cited by:
  1. Bernard Fingleton & Harry Garretsen & Ron Martin, 2012. "Recessionary Shocks And Regional Employment: Evidence On The Resilience Of U.K. Regions," Journal of Regional Science, Wiley Blackwell, vol. 52(1), pages 109-133, 02.
  2. Doran, Justin & Fingleton, Bernard, 2012. "Economic shocks and growth: spatio-temporal perspectives on Europe's economies in a time of crisis," MPRA Paper 47292, University Library of Munich, Germany.
  3. Fingleton, Bernard & Palombi, Silvia, 2013. "Spatial panel data estimation, counterfactual predictions, and local economic resilience among British towns in the Victorian era," Regional Science and Urban Economics, Elsevier, vol. 43(4), pages 649-660.

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