The Scarring and Hysteresis Effects of Steep Recessions and the Implications for Fiscal Policy in ECA Transition EMDEs
The deep recession in many of the emerging market transition economies of Europe and Central Asia caused by the COVID-19 crisis has raised fears of long-term damage to potential output through scarring and hysteresis. These economies were also hit hard by the great recession caused by the global financial crisis. This paper provides empirical estimates of the impact of the great recession on the subsequent medium-term level of real gross domestic product in a sample of 65 middle-income countries. It finds evidence of a significant hysteresis parameter in these countries. The paper also examines how the combination of a hysteresis parameter and a positive fiscal multiplier can mean that a countercyclical fiscal expansion that successfully mitigates the output loss in a recession need not worsen public debt levels in the medium to long term because of its positive impact on potential output and thus the tax base.
| Main Authors: | , |
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| Format: | Working Paper biblioteca |
| Language: | English |
| Published: |
World Bank, Washington, DC
2021-06
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| Subjects: | FISCAL POLICY, CORONAVIRUS, COVID-19, PANDEMIC RESPONSE, ECONOMIC RECESSION, EMERGING MARKET ECONOMIES, GLOBAL FINANCIAL CRISIS, HYSTERESIS, COUNTERCYCLICAL POLICY, PUBLIC DEBT, |
| Online Access: | http://documents.worldbank.org/curated/en/321251622554430953/The-Scarring-and-Hysteresis-Effects-of-Steep-Recessions-and-the-Implications-for-Fiscal-Policy-in-ECA-Transition-EMDEs http://hdl.handle.net/10986/35644 |
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| Summary: | The deep recession in many of the
emerging market transition economies of Europe and Central
Asia caused by the COVID-19 crisis has raised fears of
long-term damage to potential output through scarring and
hysteresis. These economies were also hit hard by the great
recession caused by the global financial crisis. This paper
provides empirical estimates of the impact of the great
recession on the subsequent medium-term level of real gross
domestic product in a sample of 65 middle-income countries.
It finds evidence of a significant hysteresis parameter in
these countries. The paper also examines how the combination
of a hysteresis parameter and a positive fiscal multiplier
can mean that a countercyclical fiscal expansion that
successfully mitigates the output loss in a recession need
not worsen public debt levels in the medium to long term
because of its positive impact on potential output and thus
the tax base. |
|---|