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Hysteresis in Unemployment and Jobless Recoveries

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  • Dmitry Plotnikov
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    Abstract

    This paper develops and estimates a general equilibrium rational expectations model with search and multiple equilibria where aggregate shocks have a permanent effect on the unemployment rate. If agents' wealth decreases, the unemployment rate increases for a potentially indefinite period. This makes unemployment rate dynamics path dependent as in Blanchard and Summers (1987). I argue that this feature explains the persistence of the unemployment rate in the U.S. after the Great Recession and over the entire postwar period.

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    Bibliographic Info

    Paper provided by International Monetary Fund in its series IMF Working Papers with number 14/77.

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    Length: 37
    Date of creation: 06 May 2014
    Date of revision:
    Handle: RePEc:imf:imfwpa:14/77

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    Related research

    Keywords: Unemployment; Economic recession; Economic recovery; Employment; Business cycles; Economic models; Unemployment; hysteresis; business cycles; sunspots;

    This paper has been announced in the following NEP Reports:

    References

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    1. Roger E.A. Farmer & Carine Nourry & Alain Venditti, 2013. "The Inefficient Markets Hypothesis: Why Financial Markets Do Not Work Well in the Real World," Working Papers, HAL halshs-00796672, HAL.
    2. Milton Friedman, 1957. "A Theory of the Consumption Function," NBER Books, National Bureau of Economic Research, Inc, National Bureau of Economic Research, Inc, number frie57-1.
    3. Evans, George W. & Ramey, Garey, 2006. "Adaptive expectations, underparameterization and the Lucas critique," Journal of Monetary Economics, Elsevier, Elsevier, vol. 53(2), pages 249-264, March.
    4. Milton Friedman, 1957. "Introduction to "A Theory of the Consumption Function"," NBER Chapters, National Bureau of Economic Research, Inc, in: A Theory of the Consumption Function, pages 1-6 National Bureau of Economic Research, Inc.
    5. David Wiczer, 2013. "Long-term Unemployment: Attached and Mismatched?," 2013 Meeting Papers, Society for Economic Dynamics 1101, Society for Economic Dynamics.
    6. Carmen M. Reinhart & Kenneth S. Rogoff, 2009. "This Time Is Different: Eight Centuries of Financial Folly," Economics Books, Princeton University Press, Princeton University Press, edition 1, volume 1, number 8973.
    7. Rainer Klump & Peter McAdam & Alpo Willman, 2007. "Factor Substitution and Factor-Augmenting Technical Progress in the United States: A Normalized Supply-Side System Approach," The Review of Economics and Statistics, MIT Press, vol. 89(1), pages 183-192, February.
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