Causes and Consequences of Hysteresis: Aggregate Demand, Productivity and Employment

39 Pages Posted: 23 Feb 2017

See all articles by Giovanni Dosi

Giovanni Dosi

Scuola Superiore Sant'Anna di Pisa - Laboratory of Economics and Management (LEM)

Marcelo C. Pereira

University of Campinas

Andrea Roventini

Scuola Superiore Sant'Anna di Pisa - Laboratory of Economics and Management (LEM); Observatoire Français des Conjonctures Economiques (OFCE)

Maria Enrica Virgillito

Scuola Superiore Sant'Anna di Pisa

Date Written: February 22, 2017

Abstract

In this work we develop an agent-based model where hysteresis in major macroeconomic variables (e.g. GDP, productivity, unemployment) emerges out of the decentralized interactions of heterogeneous firms and workers. Building upon the model in Dosi et al. (2016, 2017), we specify an endogenous process of accumulation of workers’ skills and a state-dependent process of entry, studying their hysteretic impacts. Indeed, hysteresis is ubiquitous. However, this is not due to market imperfections, but rather to the very functioning of decentralised economies characterised by coordination externalities and dynamic increasing returns. So, contrary to the insider-outsider hypothesis (Blanchard and Summers, 1986), the model does not support the findings that rigid industrial relations may foster hysteretic behaviour in aggregate unemployment. On the contrary, in line with the recent discussion in Ball et al. (2014), this contribution provides evidence that during severe downturns, and thus declining aggregate demand, phenomena like lower investment and innovation rates, skills deterioration, and declining entry dynamics are better candidates to explain long-run unemployment spells and lower output growth. In that, more rigid labour markets dampen hysteretic dynamics by supporting aggregate demand, thus making the economy more resilient.

Keywords: Hysteresis, Aggregate Demand, Multiple Equilibria, Skills Deterioration, Market Entry, Agent-Based Model

JEL Classification: C63, E02, E24

Suggested Citation

Dosi, Giovanni and Pereira, Marcelo and Roventini, Andrea and Virgillito, Maria Enrica, Causes and Consequences of Hysteresis: Aggregate Demand, Productivity and Employment (February 22, 2017). Available at SSRN: https://ssrn.com/abstract=2921858 or http://dx.doi.org/10.2139/ssrn.2921858

Giovanni Dosi (Contact Author)

Scuola Superiore Sant'Anna di Pisa - Laboratory of Economics and Management (LEM) ( email )

Piazza Martiri della Liberta, 33
Pisa, I-56127
Italy

HOME PAGE: www.lem.sssup.it

Marcelo Pereira

University of Campinas ( email )

Rua Pitagoras 353
Campinas, Campinas 13088-857
Brazil

Andrea Roventini

Scuola Superiore Sant'Anna di Pisa - Laboratory of Economics and Management (LEM) ( email )

Piazza Martiri della Liberta', 33-I-56127
Pisa
Italy

Observatoire Français des Conjonctures Economiques (OFCE)

69 Quai d'Orsay
Paris 75004
France

Maria Enrica Virgillito

Scuola Superiore Sant'Anna di Pisa ( email )

Biblioteca Scuola Superiore Sant'Anna
Piazza Martiri della Liberta, n. 33
Pisa, 56127
Italy

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