Hysteresis in Unemployment and Jobless Recoveries
IMF Working Papers, May 6, 2014
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- Hysteresis in Unemployment and Jobless Recoveries
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Bibliographic details
- Authors: Dmitry Plotnikov
- Published: May 6, 2014
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781484371749.001
Summary / Key Finding
- The paper develops and estimates a general equilibrium rational expectations model with search and multiple equilibria where aggregate shocks have a permanent effect on the unemployment rate.
- If agents' wealth decreases, the unemployment rate increases for a potentially indefinite period.
- This creates path dependence in unemployment rate dynamics as in Blanchard and Summers (1987).
- The author argues this mechanism explains the persistence of the unemployment rate in the U.S. after the Great Recession and over the entire postwar period.
Model and Mechanism
- General equilibrium, rational expectations framework with search and multiple equilibria.
- Permanent effects of aggregate shocks on unemployment arise through wealth reductions of agents.
- Path dependence of unemployment dynamics is a central theoretical implication.
Empirical Findings and Interpretation
- The model is developed and estimated to account for observed persistence in unemployment.
- The mechanism provides an explanation for the U.S. experience after the Great Recession and the broader postwar persistence of unemployment rates.
Subjects and Keywords
- Subjects: Consumption, Employment, Labor, National accounts, Real wages, Unemployment rate
- Keywords: business cycles, confidence interval, Consumption, depreciation rate, Employment, hysteresis, production function, productivity shock, real wage, Real wages, sunspots, TFP fluctuation, TFP series, TFP shock, Unemployment, Unemployment rate, WP