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A Simple Model of Hysteresis in Employment under Exchange Rate Uncertainty

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  • Ansgar Belke
  • Matthias Göcke

Abstract

A model leading to employment hysteresis due to sunk hiring‐ and firing‐costs is proposed. A potential mechanism based on a band of inaction that could account for a ‘weaker’ relationship between employment and its determinants is augmented by exchange rate uncertainty. As a result of option value effects the band of inaction is widened. Thus, the hysteresis effects are strongly amplified by exchange rate uncertainty (as numerical examples demonstrate). Non‐linearities in the employment‐relation are implied, i.e. ‘spurts’ in new employment or firing may occur after an initially weak response to a reversal of the exchange rate.

Suggested Citation

  • Ansgar Belke & Matthias Göcke, 1999. "A Simple Model of Hysteresis in Employment under Exchange Rate Uncertainty," Scottish Journal of Political Economy, Scottish Economic Society, vol. 46(3), pages 260-286, August.
    • Handle: RePEc:bla:scotjp:v:46:y:1999:i:3:p:260-286
    DOI: 10.1111/1467-9485.00132
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    Cited by:

    1. Matthias Göcke, 2009. "Firing versus Continuing Employment if an Economic Setback is Expected," MAGKS Papers on Economics 200918, Philipps-Universität Marburg, Faculty of Business Administration and Economics, Department of Economics (Volkswirtschaftliche Abteilung).
    2. Belke Ansgar, 2018. "Secular Stagnation, Unemployment Hysteresis and Monetary Policy in EMU: Scratches but Not Scars?," The Economists' Voice, De Gruyter, vol. 15(1), pages 1-14, December.
    3. João Tovar Jalles, 2019. "On the Time‐Varying Relationship between Unemployment and Output: What shapes it?," Scottish Journal of Political Economy, Scottish Economic Society, vol. 66(5), pages 605-630, November.

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