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Unemployment, growth and fiscal policy: new insights on the hysteresis hypothesis

  • Xavier Raurich

    ()

    (Departament d’Economia, Universitat de Girona)

  • Hector Sala Lorda

    ()

    (Departament d'Economia Aplicada, Universitat Autonoma de Barcelona and IZA)

  • Valeri Sorolla

    ()

    (Departament d’Economia i d’Història Econòmica, 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 di?erent 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 Department of Applied Economics at Universitat Autonoma of Barcelona in its series Working Papers with number wpdea0404.

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Length: 42 pages
Date of creation: Apr 2004
Date of revision:
Handle: RePEc:uab:wprdea:wpdea0404
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