The universal shape of economic recession and recovery after a shock

TL;DR

This paper introduces a simple three-parameter model that accurately describes GDP evolution during recessions and recoveries, providing insights into shock detection and economic dynamics.

Contribution

It proposes a universal response function model for economic shocks and demonstrates its effectiveness in fitting GDP data across countries.

Findings

The model fits GDP data well during recessions and recoveries.

It can detect large and small shocks, including non-recessionary ones.

A two-sector toy model illustrates how transfer rates influence recession severity.

Abstract

We show that a simple and intuitive three-parameter equation fits remarkably well the evolution of the gross domestic product (GDP) in current and constant dollars of many countries during times of recession and recovery. We then argue that this equation is the response function of the economy to isolated shocks, hence that it can be used to detect large and small shocks, including those which do not lead to a recession; we also discuss its predictive power. Finally, a two-sector toy model of recession and recovery illustrates how the severity and length of recession depends on the dynamics of transfer rate between the growing and failing parts of the economy.