Abstract:

The COVID-19 pandemic initiated a deep global recession, and with interest rates at very low levels, warrants consideration of the efficacy of different forms of fiscal stimulus in response. History reveals that deep recessions may cause output and total factor productivity (TFP) hysteresis, a permanent or highly persistent fall in the levels of output and TFP relative to pre-recession trends. This article analyses the output and welfare multipliers of fiscal stimulus during a recession using a macro model with TFP and output hysteresis. We find that transfer payments, public consumption and investment all have high output and welfare multipliers due to their positive effects on TFP in a recessionary environment. However, public investment has the highest output and welfare multipliers, because it has a more positive impact on labour productivity due to the increase in the public capital stock.

Keywords: Covid-19; Fiscal policy; Hysteresis; Recession.

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Hysteresis and fiscal stimulus in a recession

Juha Tervala

Timothy Watson

Declaration of Competing Interest

The authors declare that they have no known competing financial interests or personal relationships that could have appeared to influence the work reported in this paper.

^{University of Helsinki, Finland}

^{Australian National University, Australia}

^{Corresponding author.}

Since January 2020 Elsevier has created a COVID-19 resource centre with free information in English and Mandarin on the novel coronavirus COVID-19. The COVID-19 resource centre is hosted on Elsevier Connect, the company's public news and information website. Elsevier hereby grants permission to make all its COVID-19-related research that is available on the COVID-19 resource centre - including this research content - immediately available in PubMed Central and other publicly funded repositories, such as the WHO COVID database with rights for unrestricted research re-use and analyses in any form or by any means with acknowledgement of the original source. These permissions are granted for free by Elsevier for as long as the COVID-19 resource centre remains active.

Footnotes

^{Supplementary data to this article can be found online at}https://doi.org/10.1016/j.jimonfin.2022.102614.

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