Working Paper

Estimating Hysteresis Effects

Abstract: In this paper we identify demand shocks that can have a permanent effect on output through hysteresis effects. We call these shocks permanent demand shocks. They are found to be quantitatively important in the United States, in particular when the Great Recession is included in the sample. Recessions driven by permanent demand shocks lead to a permanent decline in employment and investment, while output per worker is largely unaffected. We find strong evidence that hysteresis transmits through a rise in long-term unemployment and a decline in labor force participation and disproportionately affects the least productive workers.

Keywords: Hysteresis; Structural vector autoregressions; Sign restrictions; Long-run restrictions; Employment; Labor productivity; Local projections;

JEL Classification: C32; E24; E32;

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Bibliographic Information

Provider: Board of Governors of the Federal Reserve System (U.S.)

Part of Series: Finance and Economics Discussion Series

Publication Date: 2021-09-09

Number: 2021-059