2017/07 | LEM Working Paper Series | |
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Causes and Consequences of Hysteresis: Aggregate Demand, Productivity and Employment |
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Giovanni Dosi, Marcelo C. Pereira, Andrea Roventini and Maria Enrica Virgillito |
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Keywords | ||
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Hysteresis, Aggregate Demand, Multiple Equilibria, Skills Deterioration, Market Entry, Agent-Based Model
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JEL Classifications | ||
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C63, E02, E24
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Abstract | ||
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In this work we develop an agent-based model where hysteresis in major
macroeconomic variables (e.g. GDP, productivity, unemployment) emerges
out of the decentralized interactions of heterogeneous firms and
workers. Building upon the model in Dosi et al. (2016, 2017), we
specify an endogenous process of accumulation of workers’ skills and a
state-dependent process of entry, studying their hysteretic impacts.
Indeed, hysteresis is ubiquitous. However, this is not due to market
imperfections, but rather to the very functioning of decentralised
economies characterised by coordination externalities and dynamic
increasing returns. So, contrary to the insider-outsider hypothesis
(Blanchard and Summers, 1986), the model does not support the findings
that rigid industrial relations may foster hysteretic behaviour in
aggregate unemployment. On the contrary, in line with the recent
discussion in Ball et al. (2014), this contribution provides evidence
that during severe downturns, and thus declining aggregate demand,
phenomena like lower investment and innovation rates, skills
deterioration, and declining entry dynamics are better candidates to
explain long-run unemployment spells and lower output growth. In that,
more rigid labour markets dampen hysteretic dynamics by supporting
aggregate demand, thus making the economy more resilient.
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