Hysteresis
Hysteresis is path dependence: a temporary shock permanently scars the level of output, employment, or inflation expectations instead of washing out.
Definition
In labor, long unemployment destroys skills and attachment so NAIRU rises. In capital, missed investment permanently lowers potential GDP. In inflation, a shock that unanchors expectations changes the process, not just the level. The opposite is a purely transitory cycle around an unchanged trend.
Why it matters
It decides whether you ‘look through’ a shock or treat it as a regime change. 2008 and COVID scarring debates were hysteresis debates.
Case
Euro-periphery youth unemployment after 2011 left a cohort with permanently weaker earnings. US COVID labor-force exits partly reversed — not all hysteresis claims survive the data.
How to read it
Need a pre-trend and a long enough window. A two-quarter level shift is not hysteresis; a five-year participation break might be.
Key papers
Landmark references with real publisher or arXiv links — not token-overlap noise.
- Hysteresis and the European Unemployment ProblemBlanchard, Summers · 1986 · NBER / NBER Macro AnnualLabor-market hysteresis.