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Hysteresis and economics - taking the economic past into account

Cross, Rod and Grinfeld, Michael and Lamba, Harbir (2009) Hysteresis and economics - taking the economic past into account. IEEE Control Systems, 29 (1). pp. 30-43. ISSN 0272-1708

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Abstract

The goal of this article is to discuss the rationale underlying the application of hysteresis to economic models. In particular, we explain why many aspects of real economic systems are hysteretic is plausible. The aim is to be explicit about the difficulties encountered when trying to incorporate hysteretic effects into models that can be validated and then used as possible tools for macroeconomic control. The growing appreciation of the ways that memory effects influence the functioning of economic systems is a significant advance in economic thought and, by removing distortions that result from oversimplifying specifications of input-output relations in economics, has the potential to narrow the gap between economic modeling and economic reality.