Hysteresis and Unemployment: a Preliminary Investigation
This paper elucidates hysteresis using a simple model of market entry and exit. A procedure for calculating hysteresis indices for economic time series is outlined. Some preliminary results assess the explanatory power of hysteresis variables in determining the equilibrium rate of unemployment in the UK. We find that natural and "unnatural" variables are involved in a cointegrating vector for UK unemployment over the period 1959-1996. The natural variable is the replacement ratio. The "unnatural" variables are the hysteresis indices for the exchange rate, the real oil price, and the real interest rate.
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