Antonio Fatás on Hysteresis and the Business Cycle
Macro Musings with David Beckworth
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The Implications of Hysteresis
There's no such thing as a pure supply shock. They're definitely going to be linked together. I think this pandemic should be a lesson for all of us. If GDP falls by 1%, the typical estimates of potential output, whether it's the CBO in the US or the IMF or the OECD across the world, they typically reduce potential output that same year by about 0.6. So if I say policy maker, I'm using that potential number as my indication of what is the output gap, how much more should I do? We need to be really, really more optimistic during crisis because otherwise we're all going to undershoot.
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