Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/149129
Authors: 
Engler, Philipp
Tervala, Juha
Year of Publication: 
2016
Series/Report no.: 
DIW Discussion Papers 1631
Abstract: 
Empirical studies support the hysteresis hypothesis that recessions have a permanent effect on the level of output. We analyze the implications of hysteresis for fiscal policy in a DSGE model. We assume a simple learning-by-doing mechanism where demand-driven changes in employment can affect the level of productivity permanently, leading to hysteresis in output. We show that the fiscal output multiplier is much larger in the presence of hysteresis and that the welfare multiplier of fiscal policy - the consumption equivalent change in welfare for one dollar change in public spending - is positive (negative) in the presence (absence) of hysteresis. The main bene.t of accommodative fiscal policy in the presence of hysteresis is to diminish the damage of a recession to the long-term level of productivity and, thus, output.
Subjects: 
fiscal policy
hysteresis
learning by doing
welfare
JEL: 
E62
F41
F44
Document Type: 
Working Paper

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