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Reconsidering the natural rate hypothesis

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  • Robert Calvert Jump
  • Engelbert Stockhammer

Abstract

The natural rate hypothesis states that there exists an unemployment rate at which inflation is stable, and that this unemployment rate is independent of aggregate demand shocks. The hysteresis hypothesis, in contrast, states that the long run unemployment rate can be affected by aggregate demand shocks. While policy makers have warned of the risk of hysteresis since the 2008 financial crash, hysteresis effects are not incorporated into the macroeconometric models used by policy making institutions. This paper presents Bayesian estimates of hysteresis effects using unobserved components models of the type used by the European Commission and OECD. We demonstrate that the posterior probability of the natural rate hypothesis holding in Germany, France, and the UK is very low, lending empirical support to the hysteresis hypothesis. We suggest that the models used by the European Commission and OECD should be amended to reflect policy makers' views on hysteresis.

Suggested Citation

  • Robert Calvert Jump & Engelbert Stockhammer, 2019. "Reconsidering the natural rate hypothesis," FMM Working Paper 45-2019, IMK at the Hans Boeckler Foundation, Macroeconomic Policy Institute.
    • Handle: RePEc:imk:fmmpap:45-2019
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    2. Arestis, Philip & Ferreiro, Jesus & Gómez, Carmen, 2020. "Quality of employment and employment protection. Effects of employment protection on temporary and permanent employment," Structural Change and Economic Dynamics, Elsevier, vol. 53(C), pages 180-188.
    3. Federico Bassi, 2020. "Chronic Excess Capacity and Unemployment Hysteresis in EU Countries. A Structural Approach," DISCE - Working Papers del Dipartimento di Economia e Finanza def091, Università Cattolica del Sacro Cuore, Dipartimenti e Istituti di Scienze Economiche (DISCE).
    4. Botta, Alberto & Tippet, Ben, 2020. "The roots of a divided eurozone: rigid labour markets or asymmetric technology-macroeconomic regimes?," Greenwich Papers in Political Economy 30958, University of Greenwich, Greenwich Political Economy Research Centre.

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    More about this item

    Keywords

    Unemployment; Hysteresis; NAIRU; Business Cycles;
    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
    • E60 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - General
    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination

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