Reverse hysteresis? Persistent effects of autonomous demand expansions

Daniele Girardi, Walter Paternesi Meloni and Antonella Stirati

Cambridge Journal of Economics, 2020, vol. 44, issue 4, 835-869

Abstract: Empirical works documenting highly persistent effects of negative demand shocks (‘hysteresis’) have questioned the prevailing wisdom that potential output is exogenous to aggregate demand fluctuations. We assess whether the effects of positive demand shocks also tend to persist beyond the short run. We estimate the impact of 126 aggregate demand expansions in OECD countries between 1960 and 2015 through local projections, using a dynamic two-way fixed-effects model and a propensity score-based specification. We find that demand expansions exert positive persistent effects on GDP, participation rate and capital stock. Effects on the unemployment rate and productivity are also strong and quite persistent, but evidence regarding their permanence is mixed. The effect on the inflation rate is positive but small and imprecisely estimated, and there is no sign of accelerating inflation. Our results bear relevant implications for existing models of hysteresis and for theories of demand-led growth.

Keywords: Hysteresis; Keynesian economics; Aggregate demand; Employment; Capital stock (search for similar items in EconPapers)
Date: 2020
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Citations: View citations in EconPapers (33)

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