世界发展银行-The-Scarring-and-Hysteresis-Effects-of-Steep-Recessions-and-the-Implications-for-Fiscal-Policy-in-ECA-Transition-EMDEs_21页_623kb

Summary of "The Scarring and Hysteresis Effects of Steep Recessions and the Implications for Fiscal Policy in ECA Transition EMDEs"

Core Content

This working paper investigates the long-term economic impacts of steep recessions, particularly the Global Financial Crisis (GFC) and the COVID-19 crisis, on middle-income countries (MICs) in the Europe and Central Asia (ECA) region. It focuses on the concept of hysteresis, which refers to the lasting negative effects of recessions on potential output, and scarring, which describes the long-term damage to economic capacity.

Main Viewpoints

• Hysteresis and Scarring: Severe recessions can have long-lasting negative impacts on potential output and growth, even after the recession has ended. This is due to factors such as reduced labor force participation, lower investment, and diminished total factor productivity (TFP).
• Impact of the GFC and COVID-19: The GFC-induced recession in 2008-09 had a significant effect on medium-term real GDP levels in ECA transition EMDEs, with a median GDP decline of 18% compared to pre-recession forecasts. The COVID-19 recession in 2020 was even more severe, with a median real GDP contraction of 4.3%.
• Fiscal Policy Implications: A countercyclical fiscal expansion during a steep recession can have positive long-term effects on potential output and the tax base, potentially offsetting the increase in public debt ratios. This implies that fiscal stimulus may not necessarily worsen public finances in the medium to long term if it mitigates the scarring effects of the recession.

Key Information

Sample and Methodology

• The study uses a sample of 65 MICs.
• It employs OLS regression to estimate the hysteresis effects of the 2009 recession on real GDP in 2013.
• The dependent variable is the percentage difference between actual and forecasted real GDP in 2013.
• Independent variables include:
  • Real GDP growth in 2009
  • The percentage difference between actual and forecasted GDP in 2009
  • Average current account balance (2006-08)
  • Change in the Global Competitiveness Index (GCI) score (2008-09 to 2012-13)
  • Change in external terms of trade (2008-2013)
  • Regional dummy variables (ECA, Asia Pacific, LAC, SSA, MENA)

Findings

• The hysteresis parameter is estimated to be in the range of 0.6-0.7, indicating that a significant portion of the output loss from the 2009 recession had long-term effects.
• The coefficients on 2009 real GDP growth and the GDP gap are positive and significant, supporting the presence of hysteresis.
• The current account balance and GCI score are also significant predictors, suggesting that pre-recession economic imbalances and competitiveness improvements had a lasting impact on output.
• The ECA region dummy is negatively significant in all models, implying that common regional factors contributed to lower-than-forecasted GDP performance after the GFC.

Implications for Fiscal Policy

• Fiscal Multipliers and Hysteresis: A positive fiscal multiplier can offset the negative effects of hysteresis, meaning that countercyclical fiscal expansion may not lead to higher public debt ratios in the long term.
• Fiscal Space: The paper emphasizes the importance of fiscal space in determining the effectiveness of fiscal stimulus. If a country has room for fiscal expansion, it can mitigate the scarring effects of a recession without compromising fiscal sustainability.
• Policy Relevance: The findings suggest that policymakers should consider the long-term implications of recessions when designing stabilization measures, especially in the context of the ongoing and future economic shocks.

Structure of the Paper

1. Introduction: Sets the context of the GFC and the ongoing impact of the COVID-19 crisis on ECA transition EMDEs.
2. Concept of Hysteresis: Reviews the theoretical and empirical basis for hysteresis, highlighting its role in explaining long-term output gaps.
3. Comparison of GFC and COVID-19 Shocks: Analyzes the relative severity of these two recessions in ECA transition EMDEs.
4. Empirical Analysis: Presents econometric estimates of the hysteresis parameter and other factors influencing post-recession GDP performance.
5. Implications for Fiscal Policy: Discusses how hysteresis affects the effectiveness of fiscal policy as a stabilization tool and the importance of fiscal space.
6. Conclusion: Summarizes the key findings and their relevance for future policy decisions in the ECA region.

Conclusion

The paper provides empirical evidence that steep recessions, such as those caused by the GFC and the ongoing COVID-19 crisis, have significant hysteresis effects on potential output in ECA transition EMDEs. This has important implications for the design and implementation of countercyclical fiscal policies, which may not only provide short-term relief but also have long-term benefits by mitigating scarring effects and improving public finances.