Hysteresis and Fiscal Policy

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Engler , P & Tervala , J V S 2018 , ' Hysteresis and Fiscal Policy ' , Journal of Economic Dynamics & Control , vol. 93 , pp. 39-53 . https://doi.org/10.1016/j.jedc.2018.02.002

Title: Hysteresis and Fiscal Policy
Author: Engler, Philipp; Tervala, Juha Veikko Sakari
Contributor: University of Helsinki, Helsinki Institute of Sustainability Science (HELSUS)
Date: 2018-08
Language: eng
Number of pages: 15
Belongs to series: Journal of Economic Dynamics & Control
ISSN: 0165-1889
URI: http://hdl.handle.net/10138/238272
Abstract: Empirical studies support the hysteresis hypothesis that recessions have a permanent effect on the level of output. We analyze the implications of hysteresis for fiscal policy in a DSGE model. We assume a simple learning-by-doing mechanism where demand-driven changes in employment can affect the level of productivity permanently, leading to hysteresis in output. We show that the fiscal output multiplier is much larger in the presence of hysteresis and that the welfare multiplier of fiscal policy-the consumption equivalent change in welfare for one dollar change in public spending-is positive (negative) in the presence (absence) of hysteresis. The main benefit of accommodative fiscal policy in the presence of hysteresis is to diminish the damage of a recession to the long-term level of productivity and, thus, output. (C) 2018 Elsevier B.V. All rights reserved.
Subject: 511 Economics

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