Are Hysteresis Effects Nonlinear?

Damiano Di Francesco and Omar Pietro Carnevale

LEM Papers Series from Laboratory of Economics and Management (LEM), Sant'Anna School of Advanced Studies, Pisa, Italy

Abstract: Do temporary aggregate demand shocks have lasting effects, and is such persistence asymmetric between contractions and expansions? Using U.S. data from 1983:Q1-2019:Q4, we identify demand shocks with potential long-run consequences via a Bayesian SVAR and trace their propagation with nonlinear local projections. We find that contractionary shocks generate larger immediate effects on output, but expansionary shocks accumulate over time and ultimately achieve comparable persistence, suggesting that hysteresis operates in both directions. We investigate the mechanisms behind this result and argue that positive hysteresis is transmitted primarily through the labor market channel: expansions durably lower longterm unemployment and raise labor force participation. By contrast, the capital accumulation and R&D channels transmit predominantly negative hysteresis.

Keywords: Hysteresis; Sign Asymmetry; SVAR; Nonlinear Local Projections; Labor Market (search for similar items in EconPapers)
Date: 2025-09-25
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