On the Foundations of Hysteresis in Economic Systems

Abstract

Hysteresis means literally “that which comes later,” being derived from the Greek verb ύστερέω. Thus, hysteresis effects, generally defined, are those that persist after the initial causes giving rise to the effects are removed.During the course of the 1980s, it became increasingly fashionable to invoke hysteresis effects to explain economic phenomena. Two of the main areas of application were to unemployment and international trade. In the case of unemployment, distinctive features of labor markets, such as social norms that rule out wage-cutting in the face of rising unemployment, imply that “increases in unemployment have a direct impact on the ‘natural’ rate of unemployment” (Blanchard and Summers, 1988, p. 15). The implication for macroeconomic systems is that “temporary shocks can have a permanent effect on the level of employment” (Ibid., p. 307). In the case of international trade, hysteresis effects arise from the industrial economics of sunk costs: “the argument is that firms must incur sunk costs to enter new markets, and cannot recoup these costs if they exit.… thus foreign firms that entered the U.S. market when the dollar was high do not abandon their sunk cost investments when the dollar falls.” The implication for trade flows is “an effect which persists after the cause that brought it about has been removed” (Dixit, 1989, p. 205).

A theory of economic policy lock-in and lock-out via hysteresis: rethinking economists’ approach to economic policy

“…It has also been applied to explain employment and unemployment patterns in labor markets (Blanchard and Summers, 1987;Cross, 1993Cross, , 1995, and to explain why aggregate demand shocks can persist and generate stagnation (Bassi and Lang, 2015). 1 The current paper aims to apply it to the theory of economic policy.…”

“…This has been the traditional locus of hysteresis analysis in economics, with exogenous developments causing changes in economic structure and behavior that are hard to reverse (Dixit, 1989(Dixit, , 1992Cross, 1993Cross, , 1995Bassi and Lang 2015).…”

Hysteresis Effects in Economics Different Methods for Describing Economic Path-Dependence

“…Being close to the original concept of hysteresis in magnetism, this method is based on the explicit aggregation of non-ideal relay agents (j = 1, ..., n ; n >> 0) with heterogeneity in their cost structure, resulting in heterogeneous entry/exit triggers D j and E j (see Amable et al, 1991Amable et al, , 1992Amable et al, , 1994Cross, 1993Cross, , 1994Göcke, 1994a, and Piscitelli et al, 2000, for applications of the Preisach model in foreign trade and in labor market economics).…”

“…As a simple way to describe persistent effects economists often try to describe hysteretic dynamics with models containing linear difference (differential) equations exhibiting unit et al, 1992, 1993and Hule, 1996, pp. 43 ff.).…”

Hysteresis nas exportações manufaturadas brasileiras: um modelo de cointegração com transição suavizada

“…O autor conclui então que é necessário levar em conta o efeito histerético quando se estudam relações entre taxa de câmbio e exportação. Tal efeito pode ser explicada pelo modelo de Preisach, conforme proposto por Cross (1993) apud Göcke (2002.…”