Stumbleupon Review of : http://www.santafe.edu/research/publications/workingpapers/97-10-080.pdf
- Path dependence refers to both those economic environments in which the history of shocks have long run consequences as well as those in which the shocks are merely persistent. The important feature in path dependent economies is that the certain shocks to the system will not work their way out of the system due to some intrinsic dynamic within the system. However, they may dissipate due to future shocks. This feature is particularly useful in thinking about models which can generate phenomena similar to the Great Depression in the United States, where the output declines of 1929-1932 do not seem to have been self-correcting, yet the New Deal and Second World War were able to shift the economy away from sustained low-production. Hence while, as an historical matter, the Depression was persistent rather than permanent, it nevertheless is defensible that the pre-World War II economy exhibited path dependence.