Template-Type: ReDIF-Paper 1.0
Author-Name: Rod Cross
Author-Name-First: Rod
Author-Name-Last: Cross
Author-Email: rod.cross@strath.ac.uk
Author-Workplace-Name: Department of Economics, University of Strathclyde
Author-Name: Hugh  McNamara
Author-Name-First: Hugh 
Author-Name-Last: McNamara
Author-Email: H.McNamara@ucc.ie 
Author-Workplace-Name: Department of applied mathematics, University cork College, Ireland
Author-Name: Alexei   Pokrovskii
Author-Name-First: Alexei  
Author-Name-Last: Pokrovskii
Author-Email: a.pokrovskii@ucc.ie
Author-Workplace-Name: Department of applied mathematics, University cork College, Ireland
Title: Memory of recessions
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.
Length: 25 pages
Creation-Date: 2010-03
Revision-Date: 
Publication-Status: 
File-URL: http://www.strath.ac.uk/media/1newwebsite/departmentsubject/economics/research/researchdiscussionpapers/2010/10-09_final.pdf
File-Format: Application/pdf
Number: 1009
Classification-JEL: E12, E32, A12
Keywords: Recessions, Permanent Effects, Hydraulic Keynesianism, Porous Media, Hysteresis.
Handle: RePEc:str:wpaper:1009