DP16558 Estimating Hysteresis Effects

Author(s): Francesco Furlanetto, Antoine Lepetit, Ørjan Robstad, Juan Francisco Rubio-Ramírez, Pal-bergset Ulvedal
Publication Date: September 2021
JEL(s): C32, E24, E32
Programme Areas: Monetary Economics and Fluctuations
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=16558

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 (including R&D 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.