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Unemployment, Growth and Fiscal Policy: New Insights on the Hysteresis Hypothesis

  • Raurich, Xavier

    ()

    (CREB, Barcelona)

  • Sala, Hector

    ()

    (Universitat Autònoma de Barcelona)

  • Sorolla, Valeri

    ()

    (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 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.

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Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 1127.

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Length: 41 pages
Date of creation: Apr 2004
Date of revision:
Publication status: published in: Macroeconomic Dynamics, 2006, 10 (3), 285-316
Handle: RePEc:iza:izadps:dp1127
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