Hysteresis in good times? Autonomous demand shocks’ effects on inflation, capital and labor in the US economy (1970–2021)

Several authors have developed different arguments on the basis of which a negative shock to aggregate demand could have persistent effects on the level of output, an effect known as hysteresis. In some cases, a positive aggregate demand shock could also have persistent effects, as long as GDP is lower than normal. We provide a substantive classification of the literature on hysteresis. We also present a model in which permanent (and positive) demand shocks have a permanent effect on the level of output and transitory effects on inflation. Finally, we analyze empirically the effects of autonomous demand shocks on unemployment, capacity utilization, inflation, capital (productive capacity) and labor participation rate in the US economy for the 1970Q1-2021Q4 period. Our results indicate that the US economy is extremely flexible to positive demand shocks even during good times, at least during the post Bretton-Woods era.