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

  • Xabier Raurich


    (Universitat Girona and Creb, Universitat de Barcelona)

  • Hector Sala

    (Universitat Autònoma de Barcelona and IZA)

  • Valeri Sorolla

    (Universitat Autònoma de Barcelona)

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 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.

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Paper provided by International Economics Institute, University of Valencia in its series Working Papers with number 0502.

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Length: 32 pages
Date of creation: Jul 2005
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Handle: RePEc:iei:wpaper:0502
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