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Unemployment, Growth, And Fiscal Policy: New Insights On The Hysteresis Hypothesis

Author

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  • RAURICH, XAVIER
  • SALA, HECTOR
  • SOROLLA, VALERI

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.

Suggested Citation

  • Raurich, Xavier & Sala, Hector & Sorolla, Valeri, 2006. "Unemployment, Growth, And Fiscal Policy: New Insights On The Hysteresis Hypothesis," Macroeconomic Dynamics, Cambridge University Press, vol. 10(3), pages 285-316, June.
    • Handle: RePEc:cup:macdyn:v:10:y:2006:i:03:p:285-316_05
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    Cited by:

    1. Marika Karanassou & Hector Sala & Pablo F. Salvador, 2008. "The (Ir)Relevance Of The Nru For Policy Making: The Case Of Denmark," Scottish Journal of Political Economy, Scottish Economic Society, vol. 55(3), pages 369-392, July.
    2. Marika Karanassou & Hector Sala & Pablo F. Salvador, 2008. "The (Ir)Relevance Of The Nru For Policy Making: The Case Of Denmark," Scottish Journal of Political Economy, Scottish Economic Society, vol. 55(3), pages 369-392, July.
    3. Kurmaş Akdoğan, 2017. "Unemployment hysteresis and structural change in Europe," Empirical Economics, Springer, vol. 53(4), pages 1415-1440, December.
    4. Marika Karanassou & Hector Sala & Dennis J. Snower, 2010. "Phillips Curves And Unemployment Dynamics: A Critique And A Holistic Perspective," Journal of Economic Surveys, Wiley Blackwell, vol. 24(1), pages 1-51, February.
    5. Raurich, Xavier & Sorolla, Valeri, 2014. "Growth, unemployment and wage inertia," Journal of Macroeconomics, Elsevier, vol. 40(C), pages 42-59.
    6. Karanassou, Marika & Sala, Hector & Snower, Dennis J., 2008. "Long-run inflation-unemployment dynamics: The Spanish Phillips curve and economic policy," Journal of Policy Modeling, Elsevier, vol. 30(2), pages 279-300.
    7. Emilio Congregado & Antonio Golpe & Simon Parker, 2012. "The dynamics of entrepreneurship: hysteresis, business cycles and government policy," Empirical Economics, Springer, vol. 43(3), pages 1239-1261, December.
    8. Marika Karanassou & Hector Sala & Dennis Snower, 2007. "The macroeconomics of the labor market: three fundamental views," Portuguese Economic Journal, Springer;Instituto Superior de Economia e Gestao, vol. 6(3), pages 151-180, December.
    9. Ángel L. Martín‐Román & Jaime Cuéllar‐Martín & Alfonso Moral, 2023. "Natural and cyclical unemployment: A stochastic frontier decomposition and economic policy implications," Bulletin of Economic Research, Wiley Blackwell, vol. 75(1), pages 5-39, January.
    10. José Ramón García & Valeri Sorolla, 2014. "Monopolistic Competition and Different Wage Setting Systems," Scottish Journal of Political Economy, Scottish Economic Society, vol. 61(1), pages 48-77, February.
    11. Alfred Greiner & Peter Flaschel, 2010. "Public Debt And Public Investment In An Endogenous Growth Model With Real Wage Rigidities," Scottish Journal of Political Economy, Scottish Economic Society, vol. 57(1), pages 68-84, February.
    12. Yasuhito Tanaka, 2023. "Government deficit and “The World’s smallest macroeconomic model” by Paul Krugman," Financial Economics Letters, Anser Press, vol. 2(1), pages 44-53, September.
    13. Raurich, Xavier & Sala, Hector & Sorolla, Valeri, 2006. "Unemployment, Growth, And Fiscal Policy: New Insights On The Hysteresis Hypothesis," Macroeconomic Dynamics, Cambridge University Press, vol. 10(3), pages 285-316, June.
    14. Vuyokazi Pikoko & Andrew Phiri, 2019. "Is There Hysteresis in South African Unemployment? Evidence from the Post-Recessionary Period," Acta Universitatis Danubius. OEconomica, Danubius University of Galati, issue 15(3), pages 365-387, JUNE.
    15. Xavier Raurich & Valeri Sorolla, 2015. "A General Framework for Growth Models with Non-Competitive Labor and Product Markets and Disequilibrium Unemployment," Working Papers 369, Barcelona School of Economics.
    16. Marika Karanassou & Hector Sala, 2008. "The Rise and Fall of Spanish Unemployment: A Chain Reaction Theory Perspective," Working Papers 633, Queen Mary University of London, School of Economics and Finance.
    17. Marika Karanassou & Hector Sala & Pablo F. Salvador, 2008. "Capital accumulation and unemployment: new insights on the Nordic experience," Cambridge Journal of Economics, Oxford University Press, vol. 32(6), pages 977-1001, November.
    18. Di Caro, Paolo, 2014. "Regional recessions and recoveries in theory and practice: a resilience-based overview," MPRA Paper 60300, University Library of Munich, Germany.
    19. Ryu‐ichiro Murota, 2018. "Aggregate demand deficiency, labor unions, and long‐run stagnation," Metroeconomica, Wiley Blackwell, vol. 69(4), pages 868-888, November.
    20. Martin Leites & Sylvina Porras, 2013. "El enfoque de la Reacción en Cadena: una aplicación para explicar la dinámica del desempleo en Uruguay," Documentos de Trabajo (working papers) 13-11, Instituto de Economía - IECON.
    21. Karanassou, Marika & Sala, Hector, 2008. "The Rise and Fall of Spanish Unemployment: A Chain Reaction Theory Perspective," IZA Discussion Papers 3712, Institute of Labor Economics (IZA).
    22. Greiner, Alfred, 2012. "Transition dynamics in an AK growth model under wage rigidity," Mathematical Social Sciences, Elsevier, vol. 63(1), pages 50-56.
    23. García, José Ramón & Sala, Hector, 2008. "The tax system incidence on unemployment: A country-specific analysis for the OECD economies," Economic Modelling, Elsevier, vol. 25(6), pages 1232-1245, November.
    24. Yasuhito Tanaka, 2024. "An overlapping generations version of Krugman’s world’s smallest macroeconomic model and fiscal deficit," Journal of Economic Analysis, Anser Press, vol. 3(4), pages 101-115, December.
    25. Marika Karanassou & Hector Sala & Dennis Snower, 2007. "The macroeconomics of the labor market: three fundamental views," Portuguese Economic Journal, Springer;Instituto Superior de Economia e Gestao, vol. 6(3), pages 151-180, December.

    More about this item

    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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