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: The potential asymmetry in hysteresis effects is explored between recessions and booms in the U.S. economy. This issue is examined by explicitly modeling the asymmetry within a bivariate VAR framework with Markov-switching volatility. The model allows for the possible correlation between aggregate demand and supply shocks, which captures the degree of hysteresis effects. Identification is achieved through a combination of short-run and long-run restrictions, along with a heteroskedasticity-based approach. Empirical results indicate no evidence of hysteresis effects during either recessions or booms prior to the mid-1980s. During this period, only aggregate supply shocks had permanent effects on output, and recessions were primarily driven by transitory demand shocks. In contrast, since the mid-1980s, clear evidence of asymmetry is found: Hysteresis effects are strong during recessions, but not during booms. In this later period, permanent demand shocks are the main driver of output fluctuations in recessions, while supply shocks dominate in expansions.
