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The scarring effects of deep contractions

Author

Listed:
  • David Aikman
  • Mathias Drehmann
  • Mikael Juselius
  • Xiaochuan Xing

Abstract

We find that deep contractions have highly persistent scarring effects, depressing the level of GDP at least a decade hence. Drawing on a panel of 24 advanced and emerging economies from 1970 to the present, we show that these effects are nonlinear and asymmetric: there is no such persistence following less severe contractions or large expansions. While scarring after financial crises is well known, it also occurred after the deep contractions of the 1970s and 1980s that followed energy price shocks and restrictive monetary policy to combat high inflation. These results are very robust and have important implications for policy making and macro modelling.

Suggested Citation

  • David Aikman & Mathias Drehmann & Mikael Juselius & Xiaochuan Xing, 2022. "The scarring effects of deep contractions," BIS Working Papers 1043, Bank for International Settlements.
    • Handle: RePEc:bis:biswps:1043
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    Cited by:

    1. Beqiraj, Elton & Cao, Qingqing & Minetti, Raoul & Tarquini, Giulio, 2023. "Persistent Slumps: Innovation and the Credit Channel of Monetary Policy," Working Papers 2023-3, Michigan State University, Department of Economics.
    2. Schmöller, Michaela, 2022. "Endogenous technology, scarring and fiscal policy," Bank of Finland Research Discussion Papers 13/2022, Bank of Finland.
    3. Miguel Leon-Ledesma & Katsuyuki Shibayama, 2023. "(Endogenous) Growth Slowdowns," Studies in Economics 2303, School of Economics, University of Kent.
    4. Camilo Granados & Daniel Parra-Amado, 2023. "Estimating the Output Gap After COVID: How to Address Unprecedented Macroeconomic Variations," Borradores de Economia 1249, Banco de la Republica de Colombia.
    5. Krahé, Max, 2023. "Understanding Italy's stagnation," Papers 277913, Dezernat Zukunft - Institute for Macrofinance, Berlin.

    More about this item

    Keywords

    Hysteresis; nonlinearity; financial crises; monetary policy; oil shocks.;
    All these keywords.

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation: Models and Applications
    • G01 - Financial Economics - - General - - - Financial Crises

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