3 First, they lift the path of potential output, either by raising the inputs to production – the supply and quality of labor and the amount of capital per worker – and by ensuring that those inputs are used more efficiently, that is to say by raising total factor productivity.
Second, they make economies more resilient to economic shocks by facilitating price and wage adjustments as well as a swift reallocation of resources within and across sectors. These two effects are complementary. An economy that rebounds faster after a negative shock is an economy that grows more over time and it suffers lower hysteresis effects.