Working Paper: CEPR ID: DP16558
Authors: Francesco Furlanetto; Antoine Lepetit; Rjan Robstad; Juan Francisco Rubioramrez; Pal Bergset Ulvedal
Abstract: 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.
Keywords: hysteresis; structural vector autoregressions; sign restrictions; long run restrictions; employment; labor productivity
JEL Codes: C32; E24; E32
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| permanent demand shocks (J23) | permanent decrease in output (E23) |
| permanent demand shocks (J23) | negative permanent effects on prices (F69) |
| permanent demand shocks (J23) | negative permanent effects on employment (J65) |
| permanent demand shocks (J23) | negative permanent effects on investment (F21) |
| permanent decrease in employment (J63) | increase in long-term unemployment (J64) |
| permanent decrease in employment (J63) | decline in participation rates (J26) |
| permanent demand shocks (J23) | rise in applications and awards for disability insurance (G52) |
| permanent demand shocks (J23) | long-term labor market consequences (J79) |
| permanent demand shocks (J23) | lasting effects on potential output (E23) |