Unemployment and Hysteresis: A Nonlinear Unobserved Components A Nonlinear Unobserved Components A Nonlinear Unobserved Components A Nonlinear Unobserved Components A Nonlinear Unobserved Components Approach

A new test for hysteresis based on a nonlinear unobserved components model is proposed. Observed unemployment rates are decomposed into a natural rate component and a cyclical component. Threshold type nonlinearities are introduced by allowing past cyclical unemployment to have a different impact on the natural rate depending onthe regime of the economy. The impact of lagged cyclical shocks on thecurrent natural component is the measure of hysteresis. To derive anappropriate p-value for a test for hysteresis two alternative bootstrapalgorithms are proposed: the first is valid under homoskedastic errorsand the second allows for heteroskedasticity of unknown form. A MonteCarlo simulation study shows the good performance of both bootstrapalgorithms. The bootstrap testing procedure is applied to data fromItaly, France and the United States. We find evidence of hysteresis forall countries under study.