Economic shocks and growth: Spatio†temporal perspectives on Europe's economies in a time of crisis

The response by regional and national economies to exogenous impulses has a well†established literature in both spatial econometrics and in mainstream econometrics and is of considerable importance given the post†2007 economic crisis, which is characterized by a period of severe global instability resulting from unprecedented economic shocks. This paper focuses on dynamic counterfactual predictions and impulse†response functions derived from appropriate econometric models. These provide insight regarding the question of whether responses to economic shocks are transitory or whether they have a permanent effect. Analysis shows that output shocks have had permanent effects on productivity so that economies have tended not to return to the pre†shock path but rather adjust to new levels. This suggests that the current recession will be embodied permanently within the memory of some of Europe's leading economies as a hysteretic effect.