On the Interdependence of Business Cycles and Economic Growth: The Case of Growth Hysteresis

The purpose of this paper is to give an empirical answer to two related but different questions: First, are economic growth and business cycles interdependent? Second, is money neutral even in the long run? Using data from the United States, this paper finds (using a VAR model) and presents evidence for the interdependence hypothesis, and against the long-run money neutrality hypothesis. The results suggest that counter- cyclical growth models best capture the main channel of influence between cycles and growth. A policy implication is that, if money affects the cycle, it is not neutral even in the long run, and a positive monetary shock may result in hysteresis, having negative growth consequences.