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Research Seminars in Economics: Thomas Lubrik (Federal Reserve Bank of Richmond): Searching for Hysteresis - 12 October 2022

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About the Event

This week the Research Seminars in Economics welcomes Thomas Lubrik (Federal Reserve Bank of Richmond).

If you would like to attend this seminar as a non-King's academic staff member, please contact

Searching for Hysteresis

Abstract: We search for hysteresis in aggregate post-WWII U.S. data. Defining hysteresis as the presence of aggregate demand shocks with a permanent impact on real GDP, we identify such shocks based on Bayesian VARs via a combination of zero long-run restrictions and both short- and long-run sign restrictions. Our findings suggest that hysteresis effects have been virtually absent for the sample excluding the financial crisis and the Great Recession, and they only appear when including the period following the collapse of Lehman Brothers.

Even then, these effects only account for at most 10 per cent of the long-run variance of GDP. We show via a DSGE model-based simulation analysis that there is a high probability of detecting hysteresis effects even when the data-generating process features none by construction. We account for this misspecification issue with a Monte Carlo-based approach.

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