Testing for hysteresis against nonlinear alternatives

Abstract

A number of studies have hypothesised certain economic behaviour to be hysteretic, but few have actually been able to establish hysteretic behaviour in the data. This is because of the lack of an effective test for hysteresis. This paper compares and contrasts two new measures of hysteretic behaviour, designed explicitly for detecting hysteresis in economic systems. Using Monte Carlo techniques, we show that one has considerably more power than the other against nonlinear, cyclical or multiple equilibria alternatives in the presence of random disturbances. The key properties of this measure appear to be functional form independence and rate independence.