Hysteresis in economics: Analysis of the relationship between business cycles, economic growth, and economic policy

Abstract

Introduction. The article analyzes the relationship between business cycles and economic growth, and reviews the evolution of this issue from the traditional denial of any connection to an alternative theory known as hysteresis. The main focus is on examining policy solutions efficiently countering structural changes induced by recessions. It is crucial to emphasize that the study of hysteresis remains highly relevant as this mechanism can be a key element in shaping efficient economic policies. These strategies, in their turn, aim at overcoming structural obstacles and promoting sustainable economic growth.

Purpose. The study investigates the impact of hysteresis on business cycles, long-term economic growth, and the development of the appropriate macroeconomic policies by the state.

Materials and Methods. The article explores the history and interrelation of business cycle and trend definitions, analyzes the main channels of hysteresis manifestation. It also reviews and analyzes studies about the development of DSGE (Dynamic Stochastic General Equilibrium) models with hysteresis and its influence on decision-making in economic policy. In this context, the paper describes DSGE models based on the “insiders – outsiders theory”, learning by doing, and R&D (Research and Development) modeling.

Results. A theoretical insider – outsider approach as the main policy measure stabilizes the labor market by wage inflation management. DSGE models also include the models with learning-by-doing mechanism; they show the impact of hysteresis on the net fiscal multiplier and the efficiency of fiscal stimulus. The analysis reveals that hysteresis significantly increases the net fiscal multiplier, thus making fiscal stimulus more efficient during recessions and recoveries in the long-run level of output. The endogenous R&D modeling emphasizes the importance of long-run monetary non-neutrality and the impact of monetary policy on financial and innovation performance and outlines the prospects for welfare improvement with asymmetric policy instruments that take into account economic specialization.

Conclusion. Hysteresis presupposes specific monetary, credit, and fiscal policy measures to ensure economic stabilization. The positive welfare multiplier typical for fiscal policy highlights its efficiency in hysteresis conditions. The study also points to the prospects of better welfare with asymmetric policy tools, especially in terms of economic specialization.

Keywords: business cycles, economic growth, hysteresis

For citation

Pankratova A. A. Hysteresis in econo­mics: Analysis of the relationship between business cycles, economic growth, and economic policy. Perm University Herald. Economy, 2024, vol. 19, no. 1, pp. 16–40. DOI 10.17072/1994-9960-2024-1-16-40. EDN APHPEG.

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