Hysteresis and fiscal stimulus in a recession

Tervala, Juha; Watson, Timothy

doi:10.1016/j.jimonfin.2022.102614

Cited by 12 publications

(7 citation statements)

References 59 publications

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“…Finally, simulations based on our simulated DSGE model provide a reasonably close match to empirical approximations based on the method of Chodorow-Reich (2019), especially over the first three years of the program period, the period before the Australian economy suffered another cyclical downturn related to the end of the mining boom. Model simulations reinforce the fact that output and employment multipliers related to public infrastructure spending can be relatively large, and also crowd-in private sector investment, making them a useful complement to transfer-like stimulus measures that tend to increase private consumption, but crowd-out private investment (see Watson et al, 2022).…”

Section: Introductionmentioning

confidence: 71%

“…From a policy perspective, the model implies that it would be optimal to combine public investment stimulus with transfers, or transfer-like measures along the lines of the JobKeeper Payment which have a more beneficial impact on private sector consumption in the short-run. The case for combining public sector investment with transfer programs in stimulus is strengthened in the open economy context, where transfer-like programs are more detrimental to international competitiveness over the medium to long-run (see Tervala and Watson, 2022). output multipliers.…”

Section: Calibration and Bayesian Estimationmentioning

confidence: 99%

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Building the Education Revolution: The Employment Effects of Fiscal Stimulus in Australia

Watson¹,

Tervala

2023

SSRN Journal

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Section: Introductionmentioning

confidence: 71%

Section: Calibration and Bayesian Estimationmentioning

confidence: 99%

Building the Education Revolution: The Employment Effects of Fiscal Stimulus in Australia

Watson¹,

Tervala

2023

SSRN Journal

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“…Contrary to Lucas (2003), who argued that the welfare costs of business cycles are negligible without hysteresis, Tervala demonstrated that the welfare costs of recessions are significant when hysteresis is considered. Tervala and Watson (2022) analyzed the output and welfare multipliers of fiscal stimulus during a recession. Transfer payments, public consumption, and investment all have high output and welfare multipliers due to their positive effects on total factor productivity (TFP) in a recessionary environment.…”

Section: The Ongoing Neoclassical Debate Regarding Hysteresismentioning

confidence: 99%

The Euro Area 12: A Comparative Assessment of Its Member States in the Period 1998–2022

Santos,

Costa,

Guedes de Oliveira

2024

Economies

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The primary objectives of this research are to compare the economic performance of the Member States (MS) in the Euro Area 12 (EA-12) of the European Union (EU) that served as net contributors and net recipients of its budget during the period 1998–2022. The comparison focuses on aspects related to economic growth and the business cycle, exploring the presence of hysteresis. To achieve these objectives, a novel approach is employed, which integrates the analysis of both growth and cycles. This approach involves using the Seemingly Unrelated Regression Equations (SURE) model to estimate a translog production frontier and assess the impact of lagging output gaps on the potential output or capacity for each of the MS considered. The data used to estimate each frontier and analyze growth decomposition consist of quarterly data filtered using the Kalman filter. The results reveal that lagging output gaps, occurring one or two quarters prior, significantly affect the potential output or capacity of the EA-12 MS, thereby supporting the existence of hysteresis. However, the impacts appear to be minimal. Furthermore, the research concludes that changes in total factor productivity (TFP), mainly due to technical change, play a more crucial role in the growth of MS that are net contributors to the EU budget. Conversely, total factor accumulation (TFA), mainly physical capital accumulation, has a more pronounced impact on the growth of MS net recipients from the EU budget. Interestingly, the heterogeneity observed among the EA-12 MS extends beyond the simple division between net contributors and net recipients of the EU budget. This heterogeneity raises questions about the European Central Bank’s (ECB) ability to stabilize the economies of these various MS solely through conventional monetary policy.

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“…To address output dynamics arising from stochastic shocks on both the demand and supply sides, we adopt Monetarist and Keynesian approaches. Furthermore, in response to economic slowdowns stemming from technological delays in adapting to changing consumer preferences, fiscal authorities can leverage a range of policy instruments (Galí, 2020;Resosudarmo et al, 2021;Tervala & Watson, 2022). For example, they may provide technological support and investment incentives for companies to engage in research and development (R&D).…”

Section: Beyond the Model: Relaxing Assumptions And Embracing Fiscal ...mentioning

confidence: 99%

Real Business Cycle: Stochastic driving force decomposition of output dynamics in East Java

Rofik,

Dwidyah Rini,

Kaluge

et al. 2023

JIBE

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This study aims to examine output dynamics in East Java using the Real Business Cycle (RBC) model. We constructed an RBC model with two stochastic shocks originating from the demand and supply sides. The RBC model in this study shows that output dynamics, as the driver of the business cycle in East Java, are mostly caused by exogenous shocks originating from the demand side. The model also shows that some variables such as wage levels, consumption, and capital accumulation exhibit inertia patterns in response to shocks. Therefore, after releasing the assumptions underlying the RBC model and accommodating fiscal and monetary policies, we argue that the response time lag shown by some of these variables can be advantageous for authorities to mitigate the impact of shocks and determine policies. Additionally, two main factors that determine policy effectiveness are understanding the sources of shocks and the timing of policy implementation.

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Hysteresis and fiscal stimulus in a recession

Cited by 12 publications

References 59 publications

Building the Education Revolution: The Employment Effects of Fiscal Stimulus in Australia

Building the Education Revolution: The Employment Effects of Fiscal Stimulus in Australia

The Euro Area 12: A Comparative Assessment of Its Member States in the Period 1998–2022

Real Business Cycle: Stochastic driving force decomposition of output dynamics in East Java

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