Hysteresis and the long shadow of the exchange rate regime

This paper offers empirical evidence consistent with hysteresis, which is the idea that temporary demand shocks can have long-lasting effects on the economy. I rely on the fact that fixers (i.e., countries with fixed exchange rates) were on average hit harder by the 2008 global financial crisis than non-fixers. Fixers continue to underperform non-fixers more than a decade after the crisis. This holds for the period 2008–2019, but also for sub-periods such as 2010–2019 and 2012–2019, which is indicative of hysteresis and even super-hysteresis effects. If hysteresis is real, it has important implications for macroeconomic stabilization policies and, by extension, the choice of exchange rate regime.