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Working Paper
Estimating Hysteresis Effects
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 sample includes the Great Recession. Recessions driven by permanent demand shocks lead to a permanent decline in employment and investment, although 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 ...
Working Paper
The Long-Run Effects of Monetary Policy
Is the effect of monetary policy on the productive capacity of the economy long lived? Yes, in fact we find such impacts are significant and last for over a decade based on: (1) merged data from two new international historical databases; (2) identification of exogenous monetary policy using the macroeconomic trilemma; and (3) improved econometric methods. Notably, the capital stock and total factor productivity (TFP) exhibit hysteresis, but labor does not. Money is non-neutral for a much longer period of time than is customarily assumed. A New Keynesian model with endogenous TFP growth can ...
Report
Slow recoveries and unemployment traps: monetary policy in a time of hysteresis
We analyze monetary policy in a model where temporary shocks can permanently scar the economy's productive capacity. Unemployed workers? skill losses generate multiple steady-state unemployment rates. When monetary policy is constrained by the zero bound, large shocks reduce hiring to a point where the economy recovers slowly at best?at worst, it falls into a permanent unemployment trap. Since monetary policy is powerless to escape such traps ex post, it must avoid them ex ante. The model quantitatively accounts for the slow U.S. recovery following the Great Recession, and suggests that lack ...
Working Paper
Hysteresis in Employment among Disadvantaged Workers
We examine hysteresis in employment-to-population ratios among less-educated men using state-level data. Results from dynamic panel regressions indicate a moderate degree of hysteresis: The effects of past employment rates on subsequent employment rates can be substantial but essentially dissipate within three years. This finding is robust to a number of variations. We find no substantial asymmetry in the persistence of high vs. low employment rates. The cumulative effect of hysteresis in the business cycle surrounding the 2001 recession was mildly positive, while the effect in the cycle ...
Working Paper
Monetary Policy in a Model of Growth
Empirical evidence suggests that recessions have long-run effects on the economy's productive capacity. Recent literature embeds endogenous growth mechanisms within business cycle models to account for these "scarring" effects. The optimal conduct of monetary policy in these settings, however, remains largely unexplored. This paper augments the standard sticky-price New Keynesian (NK) to allow for endogenous dynamics in aggregate productivity. The model has a representation similar to the two-equation NK model, with an additional condition linking productivity growth to current and expected ...
Working Paper
Some Like It Hot: Assessing Longer-Term Labor Market Benefits from a High-Pressure Economy
This paper explores evidence for positive hysteresis in the labor market. Using data from the National Longitudinal Surveys of Youth, we find that negative labor market outcomes during high unemployment periods are mitigated by exposure to a high-pressure economy during the preceding expansion. Breaking total exposure into intensity and duration suggests that these two dimensions have differing impacts. However, the benefits of exposure are not enough to overcome the greater negative impact of high unemployment periods on labor market outcomes of disadvantaged groups, making extension of ...
Working Paper
Demand Shocks, Hysteresis and Monetary Policy
This paper builds a micro-founded general equilibrium model of hysteresis in which changing composition of firms with heterogeneous qualities in response to demand shocks alter the total factor productivity of the economy through a process of "creative destruction". Hysteresis fundamentally challenges existing consensus on stabilization policies: the complete stabilization of demand shocks becomes suboptimal as demand creates its own supply; fiscal multiplier can be substantially larger than 1; an opportunistic monetary policymaker, who adopts a lenient policy reaction to positive demand ...
Working Paper
Searching for Hysteresis
Working Paper
Estimating Hysteresis Effects
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 ...
Discussion Paper
Will COVID-19 Erase Black Workers' Labor Market Gains?
Black workers experience what is known as a "high-beta" effect across the business cycle. They are hit harder during recessions but benefit more from the momentum of a recovery, especially during particularly strong economic periods. For three years preceding the COVID-19 recession, the United States was enjoying what has been referred to as a "hot" economy. During this time, Black workers regained some of the ground lost in labor market outcomes during the Great Recession, relative to white workers. The sudden onset of the COVID-19 recession reversed that progress. Even though the ...