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How large are hysteresis effects? Estimates from a Keynesian growth model

Author

Listed:
  • Steven Fazzari

    (Washington University in St. Louis)

  • Alejandro Gonzalez

    (Washington University in St. Louis)

Abstract

This paper estimates a demand-led model of macroeconomic growth and fluctuations in which the growth rate of the economy's supply side converges to the growth rate of demand. Convergence happens because labor supply and productivity growth respond to the degree of slack in the economy. Faster demand growth reduces slack and stimulates supply (and vice-versa). We estimate the model using simulated method of moments and find statistically significant and quantitatively important hysteresis effects: the semi-elasticity of productivity and labor supply to the unemployment rate are 0.73 and 0.26, respectively. For an economy with labor market slack, these estimates imply that supply growth could accommodate a one percentage point increase in the growth rate of demand with a reasonable 0.75 percentage point reduction in the long-run unemployment rate. Additionally, we show the model replicates major features of business cycles as well the response of the economy to autonomous demand shocks, providing further validation of this approach to understanding macroeconomic dynamics.

Suggested Citation

  • Steven Fazzari & Alejandro Gonzalez, 2023. "How large are hysteresis effects? Estimates from a Keynesian growth model," FMM Working Paper 89-2023, IMK at the Hans Boeckler Foundation, Macroeconomic Policy Institute.
    • Handle: RePEc:imk:fmmpap:89-2023
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    File URL: http://www.boeckler.de/pdf/p_fmm_imk_wp_89_2023.pdf
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    Citations

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    Cited by:

    1. Mark Setterfield, 2023. "Will hysteresis effects afflict the US economy during the post-COVID recovery?," Working Papers 2306, New School for Social Research, Department of Economics.
    2. Ferri, Piero & Cristini, Annalisa & Tramontana, Fabio, 2023. "Meta-models of the Phillips curve and income distribution," Journal of Economic Behavior & Organization, Elsevier, vol. 213(C), pages 215-232.

    More about this item

    Keywords

    Hysteresis; Demand-Led Growth; Supermultiplier;
    All these keywords.

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E12 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Keynes; Keynesian; Post-Keynesian; Modern Monetary Theory
    • O41 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - One, Two, and Multisector Growth Models

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