Deep contractions cause economic scars that never heal

David Aikman, Mathias Drehmann, Mikael Juselius, Xiaochuan Xing

Research output: Book/ReportCommissioned report


In our recent research, we find that deep contractions have highly persistent scarring effects, depressing the level of GDP at least a decade hence. Drawing on a panel of 24 advanced and emerging economies from 1970 to the present, we show that these effects are nonlinear and asymmetric: there is no such persistence following less severe contractions or large expansions. While the potential for scarring after financial crises is well known, we show that scarring also occurred after the deep contractions of the 1970s and 1980s that followed energy price shocks and restrictive monetary policy to combat high inflation. These results are very robust and have important implications for policy making and macro modelling.
Original languageEnglish
Place of PublicationVienna
Number of pages6
Publication statusPublished - 02.2023
MoE publication typeD4 Published development or research report or study

Publication series

NameSUERF Policy Brief


  • 511 Economics
  • hysteresis
  • nonlinearity
  • financial crises
  • monetary policy
  • oil shocks


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