Hysteresis in Unemployment and Jobless Recoveries
May 6, 2014
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Summary
This 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 makes unemployment rate dynamics path dependent as in Blanchard and Summers (1987). I argue that this feature explains the persistence of the unemployment rate in the U.S. after the Great Recession and over the entire postwar period.
Subject: 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
Pages:
37
Volume:
2014
DOI:
Issue:
077
Series:
Working Paper No. 2014/077
Stock No:
WPIEA2014077
ISBN:
9781484371749
ISSN:
1018-5941
