The Dynamics of Entrepreneurship: Hysteresis, Business Cycles and Government Policy

Abstract

This paper estimates an unobserved components model to explore the macro dynamics of entrepreneurship in Spain and the US. We ask whether entrepreneurship exhibits hysteresis, defined as a macro dynamic structure in which cyclical fluctuations have persistent effects on the natural rate of entrepreneurship. We find evidence of hysteresis in Spain, but not the US, while in both countries business cycle output variations significantly affect future rates of entrepreneurship. The article discusses implications of the findings for the design of entrepreneurship policies.

Keywords: self-employment, business cycles, time series models, unobserved components model, hysteresis, entrepreneurship

JEL Classification: C32, E32, J24