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  Electronic copy available at:   Working Papers N°10- October 2010 Ministr of Econom and Finance Deartment of the Treasur Unemployment and Hysteresis:  A Nonlinear Unobserved Components  Approach Silvestro DI SANZO, Alicia PEREZ-ALONSO ISSN 1972-411X  Electronic copy available at:      Working Papers   The working paper series promotes the dissemination of economic research produced in the Department of the Treasury (DT) of the Italian Ministry of Economy and Finance (MEF) or presented by external economists on the occasion of seminars organised by MEF on topics of institutional interest to the DT, with the aim of stimulating comments and suggestions. Copyright: ©   2010, Silvestro DI SANZO, Alicia PEREZ-ALONSO. The document can be downloaded from the Website and freely used, providing that its source and author(s) are quoted. Editorial Board: Lorenzo Codogno, Mauro Marè, Libero Monteforte, Francesco Nucci, Franco Peracchi Organisationalcoordination: Marina Sabatini    4 Unemployment and Hysteresis:  A Nonlinear Unobserved Components  Approach 1   Silvestro DI SANZO*,Alicia PEREZ-ALONSO** Abstract  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. JEL Classification: C12, C13, C15, C32, E24 Keywords: Hysteresis; Unobserved Components Model; Threshold Autoregressive Models; Nuisance parameters; Bootstrap (*) S. Di Sanzo, Confcommercio (the Italian General Confederation of Enterprises, Professional Occupations and Self-Employment), Research Department, Piazza G. G. Belli 2, 00153 Roma, Italy. E-mail: (**)  A. Perez-Alonso (corresponding author): Research Group in Economic Analysis, Facultade de CienciasEconomicas e Empresariais, Universidade de Vigo, Campus As Lagoas-Marcosende s/n, 36310 Vigo, Pontevedra, Spain. Phone: +34986812502. Fax: +34986812402. E-mail:; 1  We would like to thank Maximo Camacho, Juan Mora, Gabriel Perez-Quiros and Carolina Villegas-Sanchez for helpful comments on earlier versions of the paper.
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