Hysteresis and the learning-By-doing mechanism in the monetary policy context: a bayesian vector autoregression appoach

Standard macroeconomic theory typically assumes that output in the long-run is independent of the short-run business cycle. The hysteresis hypothesis assumes the contrary and supposes that short-run economic shocks can have a permanent effect on the level of output. This paper empirically tests the existence of hysteresis within the monetary policy context using both linear and non-linear (time-varying) Bayesian vector autoregressions. We focus on a particular channel in which hysteresis can operate: the learning-by-doing mechanism. Within the context of monetary policy, this paper finds little evidence to suggest semi-permanent hysteresis effects via this channel when considering the response of output and total factor productivity (a long-run driver of output growth) to monetary policy and employment shocks. While this paper finds some persistent shocks within the linear models, these shocks appear to largely decay over time, and may be explained as a long-term adjustment period toward equilibrium within a standard New Keynesian macroeconomic model.