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

The deep recession in many of the emerging market transition economies Europe and Central Asia caused by COVID-19 crisis has raised fears long-term damage to potential output through scarring hysteresis. These were also hit hard great global financial crisis. This paper provides empirical estimates impact on subsequent medium-term level real gross domestic product a sample 65 middle-income countries. It finds evidence significant hysteresis parameter these examines how combination positive fiscal multiplier can mean that countercyclical expansion successfully mitigates loss need not worsen public debt levels medium long term because its thus tax base.