Dynamic hysteresis effects

Ivan Mendieta-Muñoz

Working Paper Series, Department of Economics, University of Utah from University of Utah, Department of Economics

Abstract: We study how the out put gap affects potential output overtime—i.e., the dynamic hysteresis effect. To do so, we introduce novel unobserved components(UC)models that consider hysteresisas a sequence of lagged effects, thus separating the long-run recession-induced adverse effects from other trend-cycle interactions. The proposed models nest several existing UC models in the literature and accommodate two key characteristics of output dynamics: non-neutrality in the long-run and the time-to build effect. Using Bayesian estimation methods, we find robust evidence supporting the presence of hysteresis effects after the1970s,with the negative long-run effect of the Global Financial Crisis and the COVID-19 recessions robustly identified .Via Bayesian model averaging, we provide precise and intuitive output gap estimates that highlight the relationship between business cycle fluctuations and the decline in economic growth. Our findings indicate that output trend-cycle decompositions that do not consider hysteresis effects can alter stabilization policy trade-offs.

Keywords: hysteresis; time-to-build effect; trends and cycles; permanent and transitory shocks; statespacemodels; unobservedcomponents JEL Classification: C11; C32; E10; E32; O40 (search for similar items in EconPapers)
Pages: 60
Date: 2024
New Economics Papers: this item is included in nep-cfn and nep-fdg
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Persistent link: https://EconPapers.repec.org/RePEc:uta:papers:2024_01

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