In this note, published as a PERI Working Paper, Tom Michl 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 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.
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Read the Working Paper here.