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Notes on Covid-19, Potential GDP, and Hysteresis

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  • Thomas R. Michl

Abstract

This note provides a model framework for thinking about stabilization policies in the presence of hysteresis after a negative shock like the Covid-19 pandemic. Headline measures of the so-called potential GDP published by the Congressional Budget Office represent only one of many possible inflation-neutral trajectories for output. The term potential GDP is misleading since potential implies a unique limit on output. It is much more accurate to consider a range of possible trajectories or multiple equilibria. Repairing the damages from a shock will require overshooting the inflation target and running the economy above its inflation-neutral equilibrium in order to restore the status quo ante level of output and employment. The model assumes constant trend growth so that path dependence takes the form of pure output-level effects.

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  • Thomas R. Michl, 2021. "Notes on Covid-19, Potential GDP, and Hysteresis," Review of Political Economy, Taylor & Francis Journals, vol. 33(3), pages 480-486, July.
    • Handle: RePEc:taf:revpoe:v:33:y:2021:i:3:p:480-486
    DOI: 10.1080/09538259.2021.1911478
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    Cited by:

    1. Angelini, Elena & Damjanović, Milan & Darracq Pariès, Matthieu & Zimic, Srečko, 2023. "Modelling pandemic risks for policy analysis and forecasting," Economic Modelling, Elsevier, vol. 120(C).

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