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Hysteresis strikes back! The view that deep recessions may damage future productive capacity, e.g. by leading firms to reduce investment in innovation, is gaining more and more traction in the policy debate (chapter 2 of April 2021 IMF WEO, https://www.ecb.europa.eu/press/key/date/2021/html/ecb.sp210327~7b65e6526e.en.html).
I find this fascinating, because when I was in grad school (already more than 10 years ago!) I was taught that business cycles and productivity growth are two independent phenomena, which could be studied in isolation. But then the Great Recession happened...
and triggered a wave of new research reviving the Keynesian growth approach to economic fluctuations and productivity growth. For those interested, here is a selected, and admittedly very partial, review.
On the theoretical front, there was some very interesting research in the 90s embedding the idea of Keynesian growth in modern macro frameworks ( https://www.jstor.org/stable/2006706?seq=1, https://link.springer.com/article/10.1023/A:1009885203490). More recently, in joint work with @BenignoGianluca, we have provided a
(hopefully tractable :) framework embedding insights from the endogenous growth and Keynesian literatures https://academic.oup.com/restud/article/85/3/1425/4587556, https://voxeu.org/article/keynesian-model-long-run-growth. To me, that was a very interesting intellectual journey, which taught me that taking into account hysteresis effects might
change radically our view of how the economy works. For instance, pessimistic animal spirit might push the economy into a stagnation trap (low demand+low growth), without any self-equilibrating force to restore growth, which may last until drastic policy interventions are taken.
Hysteresis effects may also change our view about the optimal monetary response to fundamental demand and supply shocks ( https://www.sciencedirect.com/science/article/abs/pii/S0304393220300817, https://crei.cat/wp-content/uploads/2020/11/TSS.pdf, https://crei.cat/wp-content/uploads/2020/03/C19-1.pdf), as well as about the appropriate fiscal policy stance https://www.sciencedirect.com/science/article/pii/S0022199617301411.
Another strand of this literature has explored the quantitative importance of hysteresis effects by estimating structural models. Very nice examples are https://www.aeaweb.org/articles?id=10.1257/mac.20170269 and https://www.sciencedirect.com/science/article/abs/pii/S0014292121000131 for the US and https://www.sciencedirect.com/science/article/abs/pii/S0014292121000611 for the euro area.
What about more empirical evidence? https://www.sciencedirect.com/science/article/abs/pii/S0304393217301216 and http://ssingh.ucdavis.edu/uploads/1/2/3/2/123250431/hyst_jst_sep2020v2.pdf show that monetary shocks affect R&D spending and productivity in the medium run. There is also some very interesting micro-level evidence showing that firms react to tightening in access to
credit by reducing investment in innovation, leading to drops in future productivity https://www.aeaweb.org/articles?id=10.1257/aer.20161534, http://www.maartenderidder.com/uploads/6/2/2/3/6223410/mdr_invprod_revision__60_.pdf, which squares well with the idea that financial crises may leave permanent scars on the economy https://www.sciencedirect.com/science/article/abs/pii/S0304393219300546.
What about the future of this research program? Two ideas. First, we need more empirical evidence on how changes in aggregate demand affect firms' technology choices. Some insights come from the trade literature https://www.cemfi.es/~bustos/Trade_Exports_Technology.pdf, but more is to be done.
Second, the international dimension. Knowledge spillovers across countries means that hysteresis effects may lead to international coordination failures. In recent work with @BenignoGianluca and @mw_econ we have started to think about these issues ( https://crei.cat/wp-content/uploads/2020/07/GFRC.pdf), but
many interesting questions are open. To conclude, here are a few researchers contributing to this program @MichaSchmoeller @sanjayrajsingh @Albert_Queralto @pedm @josebammartinez @RidderMaarten @mw_econ @BenignoGianluca @AntonioFatas @GuidoCozzi @DBrizhatyuk
