Searching for Hysteresis

36 Pages Posted: 14 May 2021

See all articles by Luca Benati

Luca Benati

University of Bern

Thomas Lubik

Federal Reserve Banks - Federal Reserve Bank of Richmond

Date Written: February, 2021

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.

JEL Classification: E2, E3

Suggested Citation

Benati, Luca and Lubik, Thomas, Searching for Hysteresis (February, 2021). FRB Richmond Working Paper No. 21-3, Available at SSRN: https://ssrn.com/abstract=3843826 or http://dx.doi.org/10.21144/wp21-03

Luca Benati (Contact Author)

University of Bern ( email )

Gesellschaftsstrasse 49
Bern, BERN 3001
Switzerland

Thomas Lubik

Federal Reserve Banks - Federal Reserve Bank of Richmond ( email )

P.O. Box 27622
Richmond, VA 23261
United States

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