Estimating Hysteresis E ects - Department of Economics · 2020. 12. 21. · Estimating Hysteresis E...
Transcript of Estimating Hysteresis E ects - Department of Economics · 2020. 12. 21. · Estimating Hysteresis E...
Estimating Hysteresis Effects
Francesco Furlanetto, Ørjan Robstad, Pal Ulvedal
Norges Bank
November 2019
The views expressed in this presentation are those of the authors and do not
necessarily reflect the views of Norges Bank
Furlanetto, Robstad, Ulvedal (Norges Bank) Estimating Hysteresis Effects November 2019 1 / 27
The independence assumption
The natural rate of unemployment (and potential output) isindependent of monetary policy
’...the ”natural rate hypothesis” quickly became widely accepted andhas been the dominant paradigm in macroeconomics ever since. It isembodied in the thinking and models used by central banks, and it isthe basis of the inflation-targeting framework...(Blanchard, 2018)
The assumption has been challanged by theories of hysteresis
Hysteresis in European unemployment in the 80s (Blanchard andSummers, 1986)
Great Moderation
Great Recession
Furlanetto, Robstad, Ulvedal (Norges Bank) Estimating Hysteresis Effects November 2019 2 / 27
The independence assumption
The natural rate of unemployment (and potential output) isindependent of monetary policy
’...the ”natural rate hypothesis” quickly became widely accepted andhas been the dominant paradigm in macroeconomics ever since. It isembodied in the thinking and models used by central banks, and it isthe basis of the inflation-targeting framework...(Blanchard, 2018)
The assumption has been challanged by theories of hysteresis
Hysteresis in European unemployment in the 80s (Blanchard andSummers, 1986)
Great Moderation
Great Recession
Furlanetto, Robstad, Ulvedal (Norges Bank) Estimating Hysteresis Effects November 2019 2 / 27
Alternative interpretations: Summers vs Fernald
Furlanetto, Robstad, Ulvedal (Norges Bank) Estimating Hysteresis Effects November 2019 3 / 27
The independence assumption in empirical work
Blanchard and Quah (1989): There are two types of shocks
Shocks with temporary effects on output (demand shocks)
Shocks with permanent effects on output (supply shocks)
Coibion, Gorodnichenko and Ulate (2018): Counterfactual outputdriven only by permanent shocks is interpreted as potential output
Blanchard (2019):
There may be supply shocks with temporary effects
There may be demand shocks with permanent/long lasting effects
Furlanetto, Robstad, Ulvedal (Norges Bank) Estimating Hysteresis Effects November 2019 4 / 27
The independence assumption in empirical work
Blanchard and Quah (1989): There are two types of shocks
Shocks with temporary effects on output (demand shocks)
Shocks with permanent effects on output (supply shocks)
Coibion, Gorodnichenko and Ulate (2018): Counterfactual outputdriven only by permanent shocks is interpreted as potential output
Blanchard (2019):
There may be supply shocks with temporary effects
There may be demand shocks with permanent/long lasting effects
Furlanetto, Robstad, Ulvedal (Norges Bank) Estimating Hysteresis Effects November 2019 4 / 27
The independence assumption in empirical work
Blanchard and Quah (1989): There are two types of shocks
Shocks with temporary effects on output (demand shocks)
Shocks with permanent effects on output (supply shocks)
Coibion, Gorodnichenko and Ulate (2018): Counterfactual outputdriven only by permanent shocks is interpreted as potential output
Blanchard (2019):
There may be supply shocks with temporary effects
There may be demand shocks with permanent/long lasting effects
Furlanetto, Robstad, Ulvedal (Norges Bank) Estimating Hysteresis Effects November 2019 4 / 27
Our approach
Our goal: identify demand shocks with potentially permanent effectson output. This tells us something about the empirical relevance ofhysteresis effects.
Combine short-term (sign) and long-term (zero) restrictions in a VARmodel (Arias, Rubio-Ramirez and Waggoner, 2019)
Two types of demand shocks
A demand shock with temporary effect on outputA demand shock with potentially permanent effect on output
Two types of supply shocks
A supply shock with temporary effect on outputA supply shock with potentially permanent effect on output
Furlanetto, Robstad, Ulvedal (Norges Bank) Estimating Hysteresis Effects November 2019 5 / 27
Benchmark model
US data, 1983Q1-2019Q2
Variables:
Real GDP per capitaPCE deflatorEmployment-population ratioInvestment per capita
First differences
3 lags (BIC)
Non-informative priors (Jeffreys)
Furlanetto, Robstad, Ulvedal (Norges Bank) Estimating Hysteresis Effects November 2019 6 / 27
Identification
Demand - permanent Supply - permanent Demand - temporary Supply - temporaryShort-term
Long-term
Short-term
Long-term
Short-term
Long-term
Short-term
Long-term
GDP - - - 0 - 0Inflation - + - +Employment 0 0Investment
Furlanetto, Robstad, Ulvedal (Norges Bank) Estimating Hysteresis Effects November 2019 7 / 27
A demand shock with permanent effect on output
0 10 20 30 40
Quarters
-1.4
-1.2
-1
-0.8
-0.6
-0.4
-0.2
0
Per
cent
GDP
0 10 20 30 40
Quarters
-0.6
-0.5
-0.4
-0.3
-0.2
-0.1
0
Per
cent
Price Level
0 10 20 30 40
Quarters
-1.2
-1
-0.8
-0.6
-0.4
-0.2
0
Per
cent
Employment
0 10 20 30 40
Quarters
-5
-4.5
-4
-3.5
-3
-2.5
-2
-1.5
-1
-0.5
0
Per
cent
age
poin
ts
Investment
0 10 20 30 40
Quarters
-0.4
-0.3
-0.2
-0.1
0
0.1
0.2
0.3
Per
cent
age
poin
ts
Ouput per worker
Furlanetto, Robstad, Ulvedal (Norges Bank) Estimating Hysteresis Effects November 2019 8 / 27
A supply shock with permanent effect on output
0 10 20 30 40
Quarters
-1.4
-1.2
-1
-0.8
-0.6
-0.4
-0.2
0
Per
cent
GDP
0 10 20 30 40
Quarters
-0.3
-0.2
-0.1
0
0.1
0.2
0.3
Per
cent
Price Level
0 10 20 30 40
Quarters
-1
-0.8
-0.6
-0.4
-0.2
0
0.2
Per
cent
Employment
0 10 20 30 40
Quarters
-5
-4.5
-4
-3.5
-3
-2.5
-2
-1.5
-1
-0.5
0
Per
cent
age
poin
ts
Investment
0 10 20 30 40
Quarters
-0.6
-0.5
-0.4
-0.3
-0.2
-0.1
0
Per
cent
age
poin
ts
Ouput per worker
Furlanetto, Robstad, Ulvedal (Norges Bank) Estimating Hysteresis Effects November 2019 9 / 27
Variance decomposition
GDP
0 10 20 30 400
0.2
0.4
0.6
0.8
1
Temporary DemandTemporary SupplyPermanent DemandPermanent Supply
Price Level
0 10 20 30 400
0.2
0.4
0.6
0.8
1Employment
0 10 20 30 400
0.2
0.4
0.6
0.8
1
Investment
0 10 20 30 400
0.2
0.4
0.6
0.8
1Output per worker
0 10 20 30 400
0.2
0.4
0.6
0.8
1
Furlanetto, Robstad, Ulvedal (Norges Bank) Estimating Hysteresis Effects November 2019 10 / 27
Channels for hysteresis
Through employment:
Insider/outsider effects (Blanchard and Summers, 1986, Gali, 2016)
Skill depreciation: unemployment duration reduces employability(Krueger at al., 2014, Abraham et al, 2016)
Labor force participation hysteresis (Yagan, 2019)
Disability insurance (applications and acceptances)
Through labor productivity:
Persistent drop in investment (Benigno and Fornaro, 2017)
Spending in research and development (Moran and Queralto, 2018)
Speed of technology adoption (Anzaotegui et al., 2018)
Composition effects: larger effects on less productive firms (Caballeroand Hammour, 1994)
Composition effects: larger effects on low skilled workers (Charles etal., 2016)
Furlanetto, Robstad, Ulvedal (Norges Bank) Estimating Hysteresis Effects November 2019 11 / 27
Investigating the channels
0 10 20 30 40
Quarters
-1.4
-1.2
-1
-0.8
-0.6
-0.4
-0.2
0
Per
cent
GDP
0 10 20 30 40
Quarters
-1.2
-1
-0.8
-0.6
-0.4
-0.2
0
Per
cent
Employment
0 10 20 30 40
Quarters
-0.4
-0.3
-0.2
-0.1
0
0.1
0.2
0.3
Per
cent
Output per worker
0 10 20 30 40
Quarters
-5
-4.5
-4
-3.5
-3
-2.5
-2
-1.5
-1
-0.5
0
Per
cent
Investment
0 10 20 30 40
Quarters
-1.6
-1.4
-1.2
-1
-0.8
-0.6
-0.4
-0.2
0
0.2
0.4
Per
cent
R&D Investment
0 10 20 30 40
Quarters
-0.7
-0.6
-0.5
-0.4
-0.3
-0.2
-0.1
0
Per
cent
age
poin
ts
Routine employment share
Furlanetto, Robstad, Ulvedal (Norges Bank) Estimating Hysteresis Effects November 2019 12 / 27
Unemployment and participation
0 10 20 30 40
Quarters
-0.1
0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
Per
cent
Unemployment rate
Unemployment rate
0 10 20 30 400
0.2
0.4
0.6
0.8
1
0 10 20 30 40
Quarters
-0.05
0
0.05
0.1
0.15
0.2
0.25
0.3
0.35
0.4
0.45
Per
cent
Long-term unemployment rate
Long-term unemployment rate
0 10 20 30 400
0.2
0.4
0.6
0.8
1
0 10 20 30 40
Quarters
-0.25
-0.2
-0.15
-0.1
-0.05
0
0.05
Per
cent
Participation rate
Participation rate
0 10 20 30 400
0.2
0.4
0.6
0.8
1
Furlanetto, Robstad, Ulvedal (Norges Bank) Estimating Hysteresis Effects November 2019 13 / 27
Permanent
demand shock:
Variance
decomposition:
Robustness: Are the results driven by the great recession?
0 5 10 15 20 25 30 35 40
Quarters
-1.4
-1.2
-1
-0.8
-0.6
-0.4
-0.2
0
Per
cent
1983Q1-2019Q2
1983Q1-2019Q2
0 5 10 15 20 25 30 35 400
0.2
0.4
0.6
0.8
1
0 5 10 15 20 25 30 35 40
Quarters
-1.2
-1
-0.8
-0.6
-0.4
-0.2
0
0.2
Per
cent
1983Q1-2007Q4
1983Q1-2007Q4
0 5 10 15 20 25 30 35 400
0.2
0.4
0.6
0.8
1
Furlanetto, Robstad, Ulvedal (Norges Bank) Estimating Hysteresis Effects November 2019 14 / 27
Permanent
demand shock:
Variance
decomposition:
Taking stock
Main results so far:
Demand shocks with potentially permanent effects are important
Propagation through employment
Gali and Hammour (1993): Cholesky identification scheme
Demand shocks have long-run effects
Negative shocks increase productivity in the long run
Furlanetto, Robstad, Ulvedal (Norges Bank) Estimating Hysteresis Effects November 2019 15 / 27
What kind of demand shocks generate hysteresis effects?
Monetary policy shocks (Jorda, Singh and Taylor, 2019)
Fiscal shocks (Fatas and Summers, 2018)
Financial shocks (Guerron-Quintana and Jinnai, 2019)
Furlanetto, Robstad, Ulvedal (Norges Bank) Estimating Hysteresis Effects November 2019 16 / 27
Extending the model to 7 variables and 7 shocks
Extend the benchmark model to include:
Real wagesFed funds rate/shadow rate (Wu and Xia, 2016)Participation rate
5 shocks with potentially permanent effects on output3 demand shocks:
Monetary policy shockFinancial shockOther demand shocks
2 supply shocks:
Technology shockLabor supply shock
2 shocks with temporary effects on output
Demand shockSupply shock
Furlanetto, Robstad, Ulvedal (Norges Bank) Estimating Hysteresis Effects November 2019 17 / 27
Identification
Demand - permanent Supply - permanent Demand - temp. Supply - temp.Other
demandMonetary
policyFinancial Tech.
Laborsupply
Demand - temp. Supply - temp.
Short-term
Short-term
Short-term
Short-term
Short-term
Short-term
Long-term
Short-term
Long-term
GDP - - - - - - 0 - 0Inflation - - - + + - +Employment 0 0Investment/GDP + -Fed funds rate - + -Real wage - +
Furlanetto, Robstad, Ulvedal (Norges Bank) Estimating Hysteresis Effects November 2019 18 / 27
Variance decomposition
GDP
0 5 10 15 20 25 30 35 400
0.2
0.4
0.6
0.8
1
Temporary DemandTemporary SupplyPermanent Other DemandPermanent Monetary PolicyPermanent FinancialPermanent TechnologyPermanent Labor Supply
Employment
0 5 10 15 20 25 30 35 400
0.2
0.4
0.6
0.8
1
Output per worker
0 5 10 15 20 25 30 35 400
0.2
0.4
0.6
0.8
1
Furlanetto, Robstad, Ulvedal (Norges Bank) Estimating Hysteresis Effects November 2019 19 / 27
A financial shock with permanent effect on output
0 10 20 30 40Quarters
-1
-0.8
-0.6
-0.4
-0.2
0P
erce
ntGDP
0 10 20 30 40Quarters
-0.8
-0.6
-0.4
-0.2
0
Per
cent
Price Level
0 10 20 30 40Quarters
-0.8
-0.6
-0.4
-0.2
0
Per
cent
Employment
0 10 20 30 40Quarters
-4
-3
-2
-1
0
Per
cent
Investment
0 10 20 30 40Quarters
-0.6
-0.4
-0.2
0
0.2
Per
cent
Ouput per worker
0 10 20 30 40Quarters
-0.25
-0.2
-0.15
-0.1
-0.05
0
0.05
Per
cent
age
poin
ts
Participation rate
0 10 20 30 40Quarters
-0.2
0
0.2
0.4
0.6
Per
cent
Real wage
0 10 20 30 40Quarters
-0.6
-0.5
-0.4
-0.3
-0.2
-0.1
0
Per
cent
age
poin
ts
Fed funds rate
Furlanetto, Robstad, Ulvedal (Norges Bank) Estimating Hysteresis Effects November 2019 20 / 27
A labor supply shock with permanent effect on output
0 10 20 30 40Quarters
-1.2
-1
-0.8
-0.6
-0.4
-0.2
0P
erce
ntGDP
0 10 20 30 40Quarters
-0.6
-0.4
-0.2
0
0.2
Per
cent
Price Level
0 10 20 30 40Quarters
-0.8
-0.6
-0.4
-0.2
0
Per
cent
Employment
0 10 20 30 40Quarters
-4
-3
-2
-1
0
Per
cent
Investment
0 10 20 30 40Quarters
-0.5
-0.4
-0.3
-0.2
-0.1
0
0.1
Per
cent
Ouput per worker
0 10 20 30 40Quarters
-0.3
-0.25
-0.2
-0.15
-0.1
-0.05
0
Per
cent
age
poin
ts
Participation rate
0 10 20 30 40Quarters
-0.2
-0.1
0
0.1
0.2
0.3
0.4
Per
cent
Real wage
0 10 20 30 40Quarters
-0.6
-0.4
-0.2
0
0.2
Per
cent
age
poin
ts
Fed funds rate
Furlanetto, Robstad, Ulvedal (Norges Bank) Estimating Hysteresis Effects November 2019 21 / 27
Variance decomposition: Participation rate
Participation rate
0 5 10 15 20 25 30 35 400
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
1
Furlanetto, Robstad, Ulvedal (Norges Bank) Estimating Hysteresis Effects November 2019 22 / 27
Conclusion
We identify demand shocks that have sizeable long lasting effects onoutput
These shocks affect output primarily through the employment channel
In a larger model, financial shocks seem to explain a significantamount of the variation in output, employment and labor productivityin the longer term
Implications for policy: overshooting of inflation (Rudebusch andWilliams, 2016) , ”run the economy hot” to reverse the damagecaused by high unemployment (Yellen, 2016)
Furlanetto, Robstad, Ulvedal (Norges Bank) Estimating Hysteresis Effects November 2019 23 / 27
EXTRA
Furlanetto, Robstad, Ulvedal (Norges Bank) Estimating Hysteresis Effects November 2019 24 / 27
A monetary policy shock with permanent effect on output
0 10 20 30 40Quarters
-0.8
-0.6
-0.4
-0.2
0
0.2P
erce
ntGDP
0 10 20 30 40Quarters
-0.5
-0.4
-0.3
-0.2
-0.1
0
0.1
Per
cent
Price Level
0 10 20 30 40Quarters
-0.6
-0.5
-0.4
-0.3
-0.2
-0.1
0
Per
cent
Employment
0 10 20 30 40Quarters
-3
-2
-1
0
1
Per
cent
Investment
0 10 20 30 40Quarters
-0.3
-0.2
-0.1
0
0.1
0.2
0.3
Per
cent
Ouput per worker
0 10 20 30 40Quarters
-0.2
-0.15
-0.1
-0.05
0
0.05
Per
cent
age
poin
ts
Participation rate
0 10 20 30 40Quarters
-0.4
-0.2
0
0.2
0.4
0.6
Per
cent
Real wage
0 10 20 30 40Quarters
-0.3
-0.2
-0.1
0
0.1
0.2
0.3
Per
cent
age
poin
ts
Fed funds rate
Furlanetto, Robstad, Ulvedal (Norges Bank) Estimating Hysteresis Effects November 2019 25 / 27
A technology shock with permanent effect on output
0 10 20 30 40Quarters
-1.2
-1
-0.8
-0.6
-0.4
-0.2
0P
erce
ntGDP
0 10 20 30 40Quarters
-0.4
-0.3
-0.2
-0.1
0
0.1
0.2
Per
cent
Price Level
0 10 20 30 40Quarters
-0.8
-0.6
-0.4
-0.2
0
0.2
Per
cent
Employment
0 10 20 30 40Quarters
-4
-3
-2
-1
0
Per
cent
Investment
0 10 20 30 40Quarters
-0.6
-0.4
-0.2
0
0.2
Per
cent
Ouput per worker
0 10 20 30 40Quarters
-0.2
-0.15
-0.1
-0.05
0
0.05
Per
cent
age
poin
ts
Participation rate
0 10 20 30 40Quarters
-0.6
-0.5
-0.4
-0.3
-0.2
-0.1
0
Per
cent
Real wage
0 10 20 30 40Quarters
-0.5
-0.4
-0.3
-0.2
-0.1
0
0.1
Per
cent
age
poin
ts
Fed funds rate
Furlanetto, Robstad, Ulvedal (Norges Bank) Estimating Hysteresis Effects November 2019 26 / 27
Data
GDP: Real Gross Domestic Product, Billions of Chained 2012 Dollars, Quarterly, Seasonally Adjusted Annual Rate
Population: Population, Thousands, Monthly, Not Seasonally Adjusted
Inflation: Personal consumption expenditures (implicit price deflator), Index 2012=100, Quarterly, Seasonally Adjusted
Employment: All Employees: Total Nonfarm Payrolls, Thousands of Persons, Monthly, Seasonally Adjusted
Investment: Real Gross Private Domestic Investment, Billions of Chained 2012 Dollars, Quarterly, Seasonally AdjustedAnnual Rate
R&D investment: Real Gross Domestic Product: Research and Development, Billions of Chained 2012 Dollars,Quarterly, Seasonally Adjusted Annual Rate
Participation rate: Civilian Labor Force Participation Rate, Percent, Monthly, Seasonally Adjusted
Unemployment rate: Civilian Unemployment Rate, Percent, Monthly, Seasonally Adjusted
Long-term unemployed: Civilians Unemployed for 27 Weeks and Over, Thousands of Persons, Monthly, SeasonallyAdjusted
Real wage: Employed full time: Median usual weekly real earnings: Wage and salary workers: 16 years and over,1982-84 CPI Adjusted Dollars, Quarterly, Seasonally Adjusted
Fed funds rate: Effective Federal Funds Rate, Percent, Monthly, Not Seasonally Adjusted
Furlanetto, Robstad, Ulvedal (Norges Bank) Estimating Hysteresis Effects November 2019 27 / 27