A0450
Title: Estimating state-dependent hysteresis effects
Authors: Heejee Chang - University of Washington (United States) [presenting]
Chang-Jin Kim - University of Washington (United States)
Abstract: We explore the potential asymmetry in hysteresis effects across two volatility regimes in the U.S. economy. We examine this issue by explicitly modeling the asymmetry using a bivariate VAR framework with Markov-switching volatility and measure the degree of hysteresis through the correlation between aggregate demand and supply shocks. Identification is achieved by combining a long-run restriction with several alternative short-run restrictions, together with a heteroskedasticity-based approach. The empirical results indicate little evidence of hysteresis in either the high-volatility or low-volatility regime before the mid-1980s. During this period, only aggregate supply shocks had permanent effects on output, and recessions were largely driven by transitory demand shocks. In contrast, since the mid-1980s, we find strong evidence of hysteresis in the high-volatility regime, while the evidence for the low-volatility regime is less compelling. In this later period, permanent demand shocks dominate output fluctuations during recessions, whereas supply shocks contribute substantially during expansions.
