Macro Musings with David Beckworth Luca Fornaro on Hysteresis, Endogenous Growth, and Aggregate Demand Policies
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May 19, 2025 Luca Fornaro, a senior researcher at CREI and a professor at UPF and the Barcelona School of Economics, dives into the intricacies of hysteresis and its impact on economic growth. He discusses how downturns can cause long-term damage to productivity, leading to stagnation traps. The conversation also explores the interconnectedness of business cycles and long-term growth, as well as the role of population growth and innovation in driving economic development. Fornaro advocates for smart macroeconomic policies to stimulate recovery and address supply shocks.
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Powerlifting Analogies for Hysteresis
- David Beckworth uses Peter Conce Brown's powerlifting story to illustrate hysteresis.
- Physical strength loss after illness parallels economic recession scars on productivity.
Demand Weakness Slows Growth
- Weak demand can cast long shadows into future output by depressing investments.
- Europe's tight fiscal policies post-crisis led to stagnant productivity growth linked to demand weaknesses.
Stagnation Traps and Expectations
- Stagnation traps arise when weak demand and low growth self-reinforce.
- Even pessimistic expectations alone can trap economies in prolonged stagnation.