The empirical studies are finding more and more hysteresis

The empirical studies are finding more and more hysteresis—more hysteresis in the sense of a persistent downward shadow cast by a recession than I would have believed likely. I keep hunting for something wrong with these studies. But there are too many of them. And they all—at least all those published that cross my desk—point in the same direction: Karl Walentin and Andreas Westermark: Stabilising the real economy increases average output: “DeLong and Summers (1989)… argue that (demand) stabilisation policies can affect the mean level of output and unemployment…

…Hysteresis induced by insider-outsider wage bargaining is probably the most long-standing theoretical argument why unemployment volatility can have long-term negative effects (Blanchard and Summers 1986). On the empirical side, it has long been well established that output volatility is bad for output growth. The seminal paper is Ramey and Ramey (1995)…. Hassan and Mertens (2017) show that households’ expectational errors about future productivity increase equity risk-premia and thereby reduce output via lower investment. Dupraz et al. (2017) spell out how downward nominal wage rigidity in a search and matching framework implies that business cycles reduce output and increase unemployment if average inflation is low. The same end result is obtained by Den Haan and Sedlacek (2014) who show how limitations in contracts within an employer-employee relationship result in inefficient dissolution of matches due to business cycles…. Blanchard (2017) concludes that the most persuasive channel through which business cycles persistently affect potential output, and thereby generate hysteresis, is through workers becoming less employable….. Walentin and Westermark 2018… show that business cycles substantially reduce the level of employment and output in a labour market search model with learning on-the-job and skill loss when unemployed…. Quantitatively the effects we find are large. In particular, business cycle variation in unemployment reduces average output by 1.5%…. Recent advances in economic modelling tilts the policy conclusion towards stabilising the real economy more than previous research has motivated…




via This Is Brad DeLong’s Grasping Reality…

August 13, 2018 at 10:03PM

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