Hysteresis

Hysteresis

L

- Standard analysis suggested that raising unemployment above NAIRU should reduce inflation

- But estimates of NAIRU kept rising through 70s and 80s – NAIRU= Current rate + 2 percent

- Hysteresis: once a metal is magnetized, it is easier to magnetise in the future

Explaining

- Skill atrophy

- Network Breakdown

- Scarring

- Changes in employer behavior (end of labour hoarding)

- People who have been unemployed, more likely to remain so

Implication

- Even with expectation taken into account, medium-term Phillips curve is not vertical

- Use of high unemployment to bring down inflation can have long-lasting costs

W

Hysteresis refers to systems that have memory, where the effects of the current input (or stimulus) to the system are experienced with a certain delay in time. Such a system may exhibit path dependence, or “rate-independent memory”. Hysteresis phenomena occur in magnetic materials, ferromagnetic materials and ferroelectric materials, as well as in the elastic, electric, and magnetic behavior of materials, in which a lag occurs between the application and the removal of a force or field and its subsequent effect. Electric hysteresis occurs when applying a varying electric field, and elastic hysteresis occurs in response to a varying force. The term “hysteresis” is sometimes used in other fields, such as economics or biology, where it describes a memory, or lagging effect.

In a deterministic system with no dynamics or hysteresis, it is possible to predict the system’s output at an instant in time, given only its input at that instant in time. In a system with hysteresis, this is not possible; there is no way to predict the output without knowing the system’s current state, and there is no way to know the system’s state without looking at the history of the input. This means that it is necessary to know the path that the input followed before it reached its current value.

Many physical systems naturally exhibit hysteresis. A piece of iron that is brought into a magnetic field retains some magnetization, even after the external magnetic field is removed. Once magnetized, the iron will stay magnetized indefinitely. To demagnetized the iron, it would be necessary to apply a magnetic field in the opposite direction. This is the effect that provides the element of memory in a hard disk drive.

A system may be explicitly designed to exhibit hysteresis, especially in control theory. For example, consider a thermostat that controls a furnace. The furnace is either off or on, with nothing in between. The thermostat is a system; the input is the temperature, and the output is the furnace state. If one wishes to maintain a temperature of 20 °C, then one might set the thermostat to turn the furnace on when the temperature drop below 18 °C, and turn it off when the temperature exceeds 22 °C. This thermostat has hysteresis. If the temperature is 21 °C, then it is not possible to predict whether the furnace is on or off without knowing the history of the temperature.

The word hysteresis is often used specifically to represent rate-independent state. This means that if some of input x(t) produce an output Y(t), then the inputs X(at) produce output Y(at) for any α > 0. The magnetized iron or the thermostats have this property. Not all systems with state (or, equivalently, with memory) have this property; for examples, a linear low-pass filter has state, but its state is rate-dependent.

The term is derived from ὑστέρησις, an ancient Greek word meaning deficiency or lagging behind. It was coined by Sir James Alfred Ewing.

Economics

Economics systems can exhibit hysteresis. For examples, export performance is subject to strong hysteresis effects: because of the fixed transportation costs it may take a big push to start a country’s exports, but once the transition is made, not much may be required to keep them going.

Hysteresis is a hypothesized property of unemployment rates. It is possible that there is a ratchet effect, so a short-term rise in unemployment rates tends to persist. An example is the notion that inflationary policy leads to a permanently higher natural rate of unemployment, because inflationary expectations are sticky downward due to change wage rigidities and imperfections in the labour market. Another channel through which hysteresis can occur is through learning by doing. Workers who lose their jobs due to temporary shocks may become permanently unemployed because they miss out on the job training and skill acquisition that normally takes place. This explanation has been invoked, by Olivier Blanchard among others, as explaining the differences in long run unemployment rates between Europe and the US.

Hysteresis occurs in applications of game theory to economics, in models with product quality, agent honesty or corruption of various institutions. Slightly different initial conditions can lead to opposite outcomes and resulting stable good or bad equilibria.

Another area where hysteresis phenomena are found is capitals controls. A developing country can ban a certain kind of capital flow (e.g. engagement with international private equity funds), but when the ban is removed, the system takes a long time to return to the pre-ban state.