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Searching for Hysteresis

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Abstract

We search for the presence of hysteresis, which we dene as aggregate demand shocks that have a permanent impact on real GDP, in the U.S., the Euro Area, and the U.K. Working with cointegrated structural VARs, we nd essentially no evidence of such effects. Within a Classical statistical framework, it is virtually impossible to detect such shocks. Within a Bayesian context, the presence of these shocks can be mechanically imposed upon the data. However, unless a researcher is willing to impose the restriction that the sign of their long-run impact on GDP is the same for all draws, which amounts to imposing the very existence of hysteresis e⁄ects, the credible set of the permanent impact uniformly contains zero. We detect some weak evidence only for the U.K., originating from an increase in labor force participation and a fall in the unemployment rate.
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  • Luca Benati & Thomas A. Lubik, 2022. "Searching for Hysteresis," Working Paper 22-05, Federal Reserve Bank of Richmond.
    • Handle: RePEc:fip:fedrwp:94254
    DOI: 10.21144/wp22-05
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    More about this item

    Keywords

    Hysteresis; Bayesian methods; unit roots; permanent shocks;
    All these keywords.

    JEL classification:

    • E2 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment
    • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles

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