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Unemployment: natural rate epicycles or hysteresis?

  • Rod Cross

    ()

    (Department of Economics, University of Strathclyde)

This paper argues that the natural rate of unemployment hypothesis, in which equilibrium unemployment is determined by “structural†variables alone, is wrong: it is both implausible and inconsistent with the evidence. Instead, equilibrium unemployment is haunted by hysteresis. The curious history of the natural rate hypothesis is considered, curious because the authors of the hypothesis thought hysteresis to be relevant. The various methods that have been used to model hysteresis in economic systems are outlined, including the Preisach model with its selective, erasable memory properties. The evidence regarding hysteresis effects on output and unemployment is then reviewed. The implications for macroeconomic policy, and for the macroeconomics profession, are discussed.

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File URL: http://www.strath.ac.uk/media/departments/economics/researchdiscussionpapers/2014/14-02.pdf
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Paper provided by University of Strathclyde Business School, Department of Economics in its series Working Papers with number 1402.

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Length: 21 pages
Date of creation: Feb 2014
Date of revision:
Publication status: Published
Handle: RePEc:str:wpaper:1402
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  4. Cross, Rod, 1993. "On the Foundations of Hysteresis in Economic Systems," Economics and Philosophy, Cambridge University Press, vol. 9(01), pages 53-74, April.
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  12. Rod Cross & Julia Darby & Jonathan Ireland & Laura Piscitelli, 1999. "Hysteresis and Unemployment: a Preliminary Investigation," Computing in Economics and Finance 1999 721, Society for Computational Economics.
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  19. Laurence M. Ball, 2013. "The Case for Four Percent Inflation," Central Bank Review, Research and Monetary Policy Department, Central Bank of the Republic of Turkey, vol. 13(2), pages 17-31.
  20. Rod Cross & Dany Lang, 2011. "The NAIRU: Still 'Not An Interesting Rate of Unemployment'," European Journal of Economics and Economic Policies: Intervention, Edward Elgar, vol. 8(2), pages 317-340.
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  24. Nickell, Stephen J, 1987. "Why Is Wage Inflation in Britain So High?," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 49(1), pages 103-28, February.
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