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

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 current economic crisis. This paper focuses on dynamic counterfactual predictions and impulse-response functions to provide insight regarding the question of whether responses to economic shocks are transitory or permanent. Analysis shows that output shocks have permanent effects on productivity with economies adjusting to new levels following a shock. This suggests that the current recession will be embodied permanently within the memory of some of Europe's leading economies as a hysteretic effect.