We consider a model-averaged forecast-based estimate of the output gap to measure economic slack in ten industrialized economies. Our measure takes changes in the long-run growth rate into account and, by addressing model uncertainty using equal weights on different forecast-based estimates, is robust to different assumptions about the underlying structure of the economy. For all ten countries in the sample, we find that the estimated output gap has much larger negative movements during recessions than positive movements in expansions, suggesting business cycle asymmetry is an intrinsic characteristic of industrialized economies. Furthermore, the estimated output gap is always strongly negatively correlated with future output growth and unemployment and positively correlated with capacity utilization. It also implies a convex Phillips Curve in many cases. The model-averaged output gap is reliable in real time in the sense of being subject to relatively small revisions.

Traditionally, economic growth and business cycles have been treated independently. However, the dependence of GDP levels on its history of shocks, what economists refer to as “hysteresis,” argues for unifying the analysis of growth and cycles. In this paper, we review the recent empirical and theoretical literature that motivate this paradigm shift. The renewed interest in hysteresis has been sparked by the persistence of the Global Financial Crisis and fears of a slow recovery from the Covid-19 crisis. The findings of the recent literature have far-reaching conceptual and policy implications. In recessions, monetary and fiscal policies need to be more active to avoid the permanent scars of a downturn. And in good times, running a high-pressure economy could have permanent positive effects.

Friedman's plucking model of business fluctuations suggests that output cannot exceed an upper limit, but it is occasionally “plucked” downward below trends as a result of economic recessions. This paper investigates China's business fluctuations using quarterly real GDP data for the period 1978-2009. Our results show some evidence supporting Friedman's plucking model. We find that a ceiling effect of real output exists, and that negative asymmetric shocks significantly affect the transitory component, which captures the plucking downward behavior during the recession. The results also suggest that the basic asymmetric unobserved component model is not appropriate for directly modeling China's real output because the business cycle is inaccurately measured, but it works quite well when considering a structural break in the second quarter of 1992. The results reveal that although China's economy strengthened in the second quarter of 2009, it is essential for China's government to take further positive and effective measures to maintain sustainable development of the economy.