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Hysteresis in West German Unemployment Reconsidered

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  • Michael Reutter
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    Abstract

    The view that high unemployment in West Germany and other European countries is caused by a path dependence effect - or "hysteresis" effect - is quite popular among economists. However, because of an identification problem, much of the empirical evidence for this hypothesis is not fu lly convincing. This paper suggests a testing procedure that overcomes this problem. It is argued that in a cointegration framework it is reasonable to define hysteresis as the absence of weak exogeneity of the explanatory variables. Building on a cointeg ration model of the employment rate in West Germany, I find only weak evidence for hysteresis.

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    File URL: http://www.cesifo-group.de/portal/page/portal/DocBase_Content/WP/WP-CESifo_Working_Papers/wp-cesifo-2000/wp-cesifo-2000-01/WP240.PDF
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    Bibliographic Info

    Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 240.

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    Date of creation: 2000
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    Handle: RePEc:ces:ceswps:_240

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    Keywords: Cointegration; hysteresis; trade unions; unemployment;

    References

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    1. Lee, Hahn Shik, 1992. "Maximum likelihood inference on cointegration and seasonal cointegration," Journal of Econometrics, Elsevier, Elsevier, vol. 54(1-3), pages 1-47.
    2. Baldwin, Richard & Krugman, Paul, 1989. "Persistent Trade Effects of Large Exchange Rate Shocks," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 104(4), pages 635-54, November.
    3. Peter C.B. Phillips, 1988. "Optimal Inference in Cointegrated Systems," Cowles Foundation Discussion Papers, Cowles Foundation for Research in Economics, Yale University 866R, Cowles Foundation for Research in Economics, Yale University, revised Aug 1989.
    4. Manning, Alan, 1995. "Developments in Labour Market Theory and Their Implications for Macroeconomic Policy," Scottish Journal of Political Economy, Scottish Economic Society, vol. 42(3), pages 250-66, August.
    5. Olivier J. Blanchard & Lawrence H. Summers, 1986. "Hysteresis and the European Unemployment Problem," Working papers 427, Massachusetts Institute of Technology (MIT), Department of Economics.
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    7. Alogoskoufis, George & Manning, Alan, 1988. "Wage setting and unemployment persistence in Europe, Japan and the USA," European Economic Review, Elsevier, Elsevier, vol. 32(2-3), pages 698-706, March.
    8. Canova, Fabio & Hansen, Bruce E, 1995. "Are Seasonal Patterns Constant over Time? A Test for Seasonal Stability," Journal of Business & Economic Statistics, American Statistical Association, American Statistical Association, vol. 13(3), pages 237-52, July.
    9. Franses, Philip Hans, 1996. "Periodicity and Stochastic Trends in Economic Time Series," OUP Catalogue, Oxford University Press, Oxford University Press, number 9780198774549, October.
    10. Alan Manning, 1992. "Wage Bargaining and the Phillips Curve: The Identification and Specification of Aggregate Wage Equations," CEP Discussion Papers dp0062, Centre for Economic Performance, LSE.
    11. Franz, Wolfgang, 1990. "Hysteresis in Economic Relationships: An Overview," Empirical Economics, Springer, Springer, vol. 15(2), pages 109-25.
    12. Peter C.B. Phillips & Bruce E. Hansen, 1988. "Statistical Inference in Instrumental Variables," Cowles Foundation Discussion Papers, Cowles Foundation for Research in Economics, Yale University 869R, Cowles Foundation for Research in Economics, Yale University, revised Apr 1989.
    13. Blanchard, Olivier Jean & Summers, Lawrence H, 1988. "Beyond the Natural Rate Hypothesis," American Economic Review, American Economic Association, American Economic Association, vol. 78(2), pages 182-87, May.
    14. Profit, Stefan & Tschernig, Rolf, 1998. "Germany's labor market problems: What to do and what not to do? A survey among experts," SFB 373 Discussion Papers 1998,94, Humboldt University of Berlin, Interdisciplinary Research Project 373: Quantification and Simulation of Economic Processes.
    15. Hyllerberg, S. & Engle, R.F. & Granger, C.W.J. & Yoo, B.S., 1988. "Seasonal Integration And Cointegration," Papers, Pennsylvania State - Department of Economics 0-88-2, Pennsylvania State - Department of Economics.
    16. Hargreaves Heap, S P, 1980. "Choosing the Wrong 'Natural' Rate: Accelerating Inflation or Decelerating Employment and Growth?," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 90(359), pages 611-20, September.
    17. Kalai, Ehud, 1977. "Proportional Solutions to Bargaining Situations: Interpersonal Utility Comparisons," Econometrica, Econometric Society, Econometric Society, vol. 45(7), pages 1623-30, October.
    18. Giavazzi, Francesco & Wyplosz, Charles, 1985. "The Zero Root Problem: A Note on the Dynamic Determination of the Stationary Equilibrium in Linear Models," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 52(2), pages 353-57, April.
    19. Johansen, Soren, 1992. "Cointegration in partial systems and the efficiency of single-equation analysis," Journal of Econometrics, Elsevier, Elsevier, vol. 52(3), pages 389-402, June.
    20. Carlin, Wendy & Soskice, David, 1990. "Macroeconomics and the Wage Bargain: A Modern Approach to Employment, Inflation, and the Exchange Rate," OUP Catalogue, Oxford University Press, Oxford University Press, number 9780198772446, October.
    21. Bruno Amable & Jérôme Henry & Frédéric Lordon & Richard Topol, 1993. "Unit Root in the Wage-Price Spiral Is Not Hysteresis in Unemployment," Journal of Economic Studies, Emerald Group Publishing, Emerald Group Publishing, vol. 20(1/2), pages 123-135, January.
    22. Roed, Knut, 1997. " Hysteresis in Unemployment," Journal of Economic Surveys, Wiley Blackwell, Wiley Blackwell, vol. 11(4), pages 389-418, December.
    23. Franz, Wolfgang, 1990. "Hysteresis in economic relationships: An overview," Discussion Papers, Series II 104, University of Konstanz, Collaborative Research Centre (SFB) 178 "Internationalization of the Economy".
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    Cited by:
    1. Wolfgang Franz, 2001. "Neues von der NAIRU?," Journal of Economics and Statistics (Jahrbuecher fuer Nationaloekonomie und Statistik), Justus-Liebig University Giessen, Department of Statistics and Economics, Justus-Liebig University Giessen, Department of Statistics and Economics, vol. 221(3), pages 256-284.
    2. Christian Bayer & Falko Jü�en, 2007. "Convergence in West German Regional Unemployment Rates," German Economic Review, Verein für Socialpolitik, Verein für Socialpolitik, vol. 8, pages 510-535, November.

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