FMM Working Paper - No. 89 - March 2023 - How Large Are Hysteresis Effects? Estimates from a Keynesian Growth Model

Sep 18, 2026

Uploaded by Connor

This paper estimates a demand-led macroeconomic growth framework in which the economy’s supply-side growth rate converges to demand growth. Convergence arises because labor supply and productivity growth respond to economic slack. Using simulated method of moments, the study finds statistically significant hysteresis effects: the unemployment-rate semi-elasticities of productivity and labor supply are 0.73 and 0.26. For slack economies, demand acceleration can raise supply growth while lowering long-run unemployment. The model also matches major business-cycle features and responses to autonomous demand shocks, supporting its account of macro dynamics.

LanguageEnglish

CategoryResearch & Report

FormatPDF

Pages47

Reading Time1 h 58 min

AccessFree to download

Abstract

Introduction

Role of demand in macroeconomic activity

From mainstream models to demand-led perspectives

Model and estimation approach

Results on hysteresis effects

Implications for business cycles and shocks

FMM WORKING PAPER No. 89 • March 2023 • Hans-Böckler-Stiftung HOW LARGE ARE HYSTERESIS EFFECTS? ESTIMATES FROM A KEYNESIAN GROWTH MODEL Steven Fazzari 1 , Alejandro González 2 ABSTRACT This paper estimates a demand-led model of macroeconomic growth and fluctuations in which the growth rate of the economy’s supply side converges to the growth rate of demand. Convergence happens because labor supply and productivity growth respond to the degree of slack in the economy. Faster demand growth reduces slack and stimulates supply (and vice-versa) . We estimate the model using simulated method of moments and find statistically significant and quantitatively important hysteresis effects: the semi-elasticity of productivity and labor supply to the unemployment rate are 0.73 and 0.26, respectively. For an economy with labor market slack, these estimates imply that supply growth could accommodate a one percentage point increase in the growth rate of demand with a reasonable 0.75 percentage point reduction in the long-run unemployment rate. Additionally, we show the model replicates major features of business cycles as well the response of the economy to autonomous demand shocks, providing further validation of this approach to understanding macroeconomic dynamics. 1 Washington University in St. Louis, [fazz@wustl.edu](fazz@wustl.edu) ; FMM Fellow. 2 Washington University in St. Louis, [alejandro.g@wustl.edu](alejandro.g@wustl.edu). How large are hysteresis effects? Estimates from a Keynesian growth model ∗ Steven Fazzari Washington University in St. Louis Fellow, Forum for Macroeconomics and Macroeconomic Policy [fazz@wustl.edu](fazz@wustl.edu) Alejandro Gonz´alez Washington University in St. Louis [alejandro.g@wustl.edu](alejandro.g@wustl.edu) March, 2023 Abstract: This paper estimates a demand-led model of macroeconomic growth and fluctuations in which the growth rate of the economy’s supply side converges to the growth rate of demand. Convergence happens because labor supply and productivity growth respond to the degree of slack in the economy. Faster demand growth reduces slack and stimulates supply (and vice-versa) . We estimate the model using simulated method of moments and find statistically significant and quantitatively important hysteresis effects: the semi-elasticity of productivity and labor supply to the unemployment rate are 0.73 and 0.26, respectively. For an economy with labor market slack, these estimates imply that supply growth could accommodate a one percentage point increase in the growth rate of demand with a reasonable 0.75 percentage point reduction in the long-run unemployment rate. Additionally, we show the model replicates major features of business cycles as well the response of the economy to autonomous demand shocks, providing further validation of this approach to understanding macroeconomic dynamics. JEL Codes: E32; E12; O41 Keywords: Hysteresis, Demand-Led Growth, Supermultiplier ∗We thank Robert Blecker, Marwil D´avila-Fern´andez, Fabio Ghironi, Brian Greaney, and Peter Skott for comments and suggestions. We would also like to thank conference participants at the Keynesian Economics Working Group, the 2020 Annual Young Scholars Initiative Plenary, the 3rd Warsaw Money-Macro-Finance conference, the International Workshop on demand-led growth, Rio, the 33rd Annual EAEPE conference, the 26th FMM Conference, Berlin, the 2023 Eastern Economics Association conference, and seminar participants at Washington University in St. Louis, the University of Washington, and Roma Tre university. Remaining errors are our sole responsibility. 1 Introduction What is the role of demand in driving macroeconomic activity? No one would deny demand is necessary to motivate production in a market economy; what is not sold, or at least expected to be sold, will not be produced. However, mainstream macroeconomic models since (at least) Modigliani (1944) relegated the role of demand to t

FAQs

What core relationship does the paper propose between demand and supply-side growth?

The model assumes demand growth and supply-side growth converge because labor supply and productivity respond to the degree of slack in the economy.

How are hysteresis effects estimated and what key magnitudes are reported?

The paper uses simulated method of moments and finds significant hysteresis effects, including unemployment-rate semi-elasticities of productivity (0.73) and labor supply (0.26).

What do the estimates imply for economies with labor market slack?

For an economy with slack, the results imply supply growth can accommodate a one percentage point increase in demand growth with a reasonable 0.75 percentage point reduction in the long-run unemployment rate.

Sep 18, 2026

Uploaded by Connor