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Working Papers

February 2021, No. 21-03

Searching for Hysteresis

Luca Benati and Thomas A. Lubik

We search for the presence of hysteresis, which we define 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 find 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 effects, 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.

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