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UNEMPLOYMENT, GROWTH, AND FISCAL POLICY: NEW INSIGHTS ON THE HYSTERESIS HYPOTHESIS

Published online by Cambridge University Press:  25 April 2006

XAVIER RAURICH ,
HECTOR SALA  and
VALERI SOROLLA
XAVIER RAURICH
Affiliation:
Universitat de Barcelona and CREB
HECTOR SALA
Affiliation:
Universitat Autònoma de Barcelona and IZA
VALERI SOROLLA
Affiliation:
Universitat Autònoma de Barcelona
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Abstract

We develop a growth model with unemployment due to imperfections in the labor market. In this model, wage inertia and balanced budget rules cause a complementarity between capital and employment capable of explaining the existence of multiple equilibrium paths. Hysteresis is viewed as the result of a selection between these different paths. We use this model to arguea that, in contrast to the United States, those fiscal policies followed by most of the European countries after the shocks of the 1970s may have played a central role in generating hysteresis.

Keywords

UnemploymentHysteresisMultiple EquilibriaFiscal Policy
Type
ARTICLES
Information
Macroeconomic Dynamics , Volume 10 , Issue 3 , June 2006 , pp. 285 - 316
Copyright
© 2006 Cambridge University Press

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