Booms, Crises, and Recoveries: A New Paradigm of the Business Cycle and its Policy Implications

Valerie Cerra and Sweta Saxena

No 2017/250, IMF Working Papers from International Monetary Fund

Abstract: All types of recessions, on average, not just those associated with financial and political crises (as in Cerra and Saxena, AER 2008), lead to permanent output losses. These findings have far-reaching conceptual and policy implications. A new paradigm of the business cycle needs to account for shifts in trend output and the puzzling inconsistency of output dynamics with other cyclical components of production. The ‘output gap’ can be ill-conceived, poorly measured, and inconsistent over time. Persistent losses require more buffers and crisis-avoidance policies, affecting tradeoffs in prudential, macroeconomic, and reserve management policies. The frequency and depth of crises are key determinants of long-term growth and drive a new stylized model of economic development.

Keywords: WP; recession; financial crisis; crisis; business cycle; booms; crises; recoveries; output gap; growth; development; fiscal policy; monetary policy; foreign reserves; macro-prudential policy; Global Financial Crisis; output loss; economic development; debt-crisis legacy; recession consist; output gap estimate; banking recession; recession year; shift aggregate; recession period; output gaps in the United States; output gap in the recession; Business cycles; Banking crises; Potential output; Global (search for similar items in EconPapers)
Pages: 31
Date: 2017-11-16
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Citations: View citations in EconPapers (46)

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