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Unemployment, growth and fiscal policy: new insights on the hysteresis hypothesis

Author

Listed:
  • Xavier Raurich

    (Departament d’Economia, Universitat de Girona)

  • Hector Sala Lorda

    (Departament d'Economia Aplicada, Universitat Autonoma de Barcelona and IZA)

  • Valeri Sorolla

    (Departament d’Economia i d’Història Econòmica, Universitat Autònoma de Barcelona)

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 di?erent equilibrium paths. We use this model to argue that, in contrast to the US, those fiscal policies followed by most of the European countries after the shocks of the 1970’s may have played a central role in generating hysteresis.

Suggested Citation

  • Xavier Raurich & Hector Sala Lorda & Valeri Sorolla, 2004. "Unemployment, growth and fiscal policy: new insights on the hysteresis hypothesis," Working Papers wpdea0404, Department of Applied Economics at Universitat Autonoma of Barcelona.
    • Handle: RePEc:uab:wprdea:wpdea0404
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    References listed on IDEAS

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    More about this item

    Keywords

    hysteresis; multiple equilibria; economic growth; fiscal policy.;
    All these keywords.

    JEL classification:

    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • O41 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - One, Two, and Multisector Growth Models

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