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Memory of Recessions

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

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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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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  1. Avinash K. Dixit & Robert S. Pindyck, 1994. "Investment under Uncertainty," Economics Books, Princeton University Press, edition 1, number 5474, 01-2013.
  2. Colander, David C. & Föllmer, Hans & Haas, Armin & Goldberg, Michael & Kirman, Alan & Jusélius, Katarina & Lux, Thomas & Sloth, Brigitte, 2009. "The financial crisis and the systemic failure of academic economics," Kiel Working Papers 1489, Kiel Institute for the World Economy (IfW).
  3. Leeson,Robert (ed.), 2000. "A. W. H. Phillips: Collected Works in Contemporary Perspective," Cambridge Books, Cambridge University Press, number 9780521571357, November.
  4. Hamilton, James D, 1989. "A New Approach to the Economic Analysis of Nonstationary Time Series and the Business Cycle," Econometrica, Econometric Society, vol. 57(2), pages 357-84, March.
  5. Cross,Rod Preface by-Name:Blanchard,Olivier (ed.), 1995. "The Natural Rate of Unemployment," Cambridge Books, Cambridge University Press, number 9780521483308, November.
  6. Friedman, Milton, 1993. "The "Plucking Model" of Business Fluctuations Revisited," Economic Inquiry, Western Economic Association International, vol. 31(2), pages 171-77, April.
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