Economic shocks and growth: spatio-temporal perspectives on Europe's economies in a time of crisis

Abstract

The response by regional and national economies to exogenous impulses has a well-established literature in both spatial econometrics and in mainstream econometrics and is of considerable importance given the post-2007 economic crisis, which is characterised by a period of severe global instability resulting from unprecedented economic shocks. This paper focuses on dynamic counterfactual predictions and impulse-response functions derived from appropriate econometric models. These provide insight regarding the question of whether responses to economic shocks are transitory or whether they have a permanent effect. Analysis shows that output shocks have had permanent effects on productivity so that economies have tended not to return to the pre-shock path but rather adjust to new levels. This suggests that the current recession will be embodied permanently within the memory of some of Europe's leading economies as a hysteretic effect.