Abstract: 

We show that hysteresis -the persistent effect of aggregate demand shocks on output - operates following both contractions and expansions, challenging the view that it is exclusively a recession phenomenon. Using U.S. data (1983:Q1-2019:Q4), we identify demand shocks with potential long-run consequences via a Bayesian SVAR and trace their propagation with nonlinear local projections. Contractionary shocks generate larger immediate effects, but expansionary shocks accumulate over time and achieve comparable persistence. Positive hysteresis is transmitted primarily through the labor market: expansions durably lower long-term unemployment and raise labor force participation. By contrast, the capital accumulation and R&D channels transmit predominantly negative hysteresis.

Awards: Best Paper Award (Honorable Mention) at the International Association for Applied Economics (IAEE), 2025.