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How well does the Aggregate Demand - Aggregate Supply framework explain unemployment fluctuations? A France - United States Comparison

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  • Yann Algan

Abstract

This paper reviews the ability of the traditional aggregate demand–aggregate supply framework to explain the unemployment fluctuations of the last three decades. A structural VAR model for the growth rates of labor productivity, inflation and unemployment is estimated on American and French data. By using long-run identifying restrictions, unemployment fluctuations are associated with conventional aggregate demand and aggregate supply shocks and with a supplementary residual innovation. One key finding is that the residual shock is far more significant in France than in the United States. The traditional macroeconomic synthesis proves then to be well suited for the American labor market while it leaves unexplained a large part of the French unemployment drift. This result questions the conventional prior that the heterogeneity in unemployment experiences lies in the magnitude of aggregate shocks or in their propagation mechanisms and calls for alternative explanations.

Suggested Citation

  • Yann Algan, 2000. "How well does the Aggregate Demand - Aggregate Supply framework explain unemployment fluctuations? A France - United States Comparison," Sciences Po publications info:hdl:2441/8886, Sciences Po.
  • Handle: RePEc:spo:wpmain:info:hdl:2441/8886
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    Keywords

    Unemployment; Labor market rigidities; Hysteresis; Structural VAR;

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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