Hysteresis and Instability in the Natural Rate of Unemployment

Cross, Rod

doi:10.2307/3440485

Cited by 40 publications

(30 citation statements)

References 27 publications

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“…Third, a test for seasonal and long-run fractional integration on raw data is carried out. This enables us to investigate not only i) the long run persistence of shocks in the unemployment series (traditional hysteresis hypothesis, Blanchard and Summers (1986;1987) and Cross (1987)) and ii) the presence of structural breaks of unknown timing (structuralist hypothesis, Phelps (1994)), but also iii) the seasonal persistence of shocks (seasonal hysteresis).…”

Section: Discussionmentioning

confidence: 99%

The nature of occupational unemployment rates in the United States: hysteresis or structural?

2009

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Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. The Institute for the Study of Labor (IZA) in Bonn is a local and virtual international research center and a place of communication between science, politics and business. IZA is an independent nonprofit organization supported by Deutsche Post World Net. The center is associated with the University of Bonn and offers a stimulating research environment through its international network, workshops and conferences, data service, project support, research visits and doctoral program. IZA engages in (i) original and internationally competitive research in all fields of labor economics, (ii) development of policy concepts, and (iii) dissemination of research results and concepts to the interested public. Terms of use: Documents in D I S C U S S I O N P A P E R S E R I E SIZA Discussion Papers often represent preliminary work and are circulated to encourage discussion. Citation of such a paper should account for its provisional character. A revised version may be available directly from the author. This paper provides new evidence on the nature of occupational differences in unemployment dynamics, which is relevant for the debate between the structural or hysteresis hypotheses. We develop a procedure that permits us to test for the presence of a structural break at unknown date. Our approach allows the investigation of a broader range of persistence than the 0/1 paradigm about the order of integration, usually implemented for testing the hypothesis of hysteresis in occupational unemployment. In almost all occupations, we find support for both the structuralist and the hysteresis hypotheses, but stress the importance of estimating the degree of persistence of seasonal shocks along with the degree of long-run persistence on raw data without applying seasonal filters. Indeed hysteresis appears to be underestimated when data are initially adjusted using traditional seasonal filters.JEL Classification: E24, C22, J62

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Section: Discussionmentioning

confidence: 99%

The nature of occupational unemployment rates in the United States: hysteresis or structural?

2009

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“…If bank assets and liabilities have identical characteristics to other borrowing and saving instruments, such as bonds, then bank and non-bank instruments will trade at the same price (assuming risk neutrality). The pass-through from market interest rates to bank rates is immediate and complete (Dale and Haldane, 1993). Financial prices in this perfect capital market allocate financial quantities optimally.…”

Section: The Functioning Of Credit Markets and The New Economymentioning

confidence: 99%

“…32 On the other hand, even where competition is fierce but information is distributed asymmetrically, there may be a desire of both firms and workers to have longer-term working relationships entailing an implicit insurance against excessive wage volatility, or firms may refrain from downward wage adjustments in order not to jeopardise employee motivation and labour productivity. Moreover, from the hysteresis literature (Cross, 1988), wage rigidities causing unemployment persistence are explained with insider-outsider and duration theories of the wage bargaining process.…”

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confidence: 99%

New Economy, Old Central Banks?

Berk¹

2003

Economic Notes

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SummaryProponents of the so-called New Economy claim that it entails a structural change of the economy. Such a change, in turn, would require the central bank to rethink its monetary policy to the extent that traditional relationships between inflation and economic growth are no longer valid. But such a rethinking presupposes that prospective advances in information technology and other factors associated with the new economy do not threaten the capacity of central banks to stabilise the general level of prices. It is the aim of this paper to shed some light on the latter, by analysing the monetary transmission mechanism in a 'new economy' environment. We argue that, although the form of central bank instruments and current methods for implementing monetary policy may change, the goals that the policy makers try to achieve by employing these instruments remain valid, and achievable.

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“…Besides, these methods do not allow the rate to which reversion occurs (the natural rate) to shift, and are therefore inadequate to describe the pattern observed in unemployment rates. Note that under hysteresis (or persistence -see, e.g., Blanchard and Summers, 1986, 1987and Cross, 1987) the order of integration (denoted by d) should be equal to or at least close to 1, implying that the effects of the shocks are permanent (if d = 1) or at least highly persistent (if d < 1 though close to 1), whilst infrequent breaks would give support to the structuralist view (Phelps, 1994). On the other hand, a value of d close to 0 would favour NAIRU theories (see, e.g., Friedman, 1968).…”

Section: Introductionmentioning

confidence: 98%

Multiple shifts and fractional integration in the US and UK unemployment rates

Caporale

Gil-Alana

2008

J Econ Finance

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This paper analyses the long-run behaviour of the US and UK unemployment rates by testing for possibly fractional orders of integration and multiple shifts using a sample of over 100 annual observations. The results show that the orders of integration are higher than 0 in both series, which implies long memory. If we assume that the underlying disturbances are white noise, the values are higher than 0.5, i.e., nonstationary. However, if the disturbances are autocorrelated, the orders of integration are in the interval (0, 0.5), implying stationarity and mean-reverting behaviour. Moreover, when multiple shifts are taken into account, unemployment is more persistent in the US than in the UK, implying the need for stronger policy action in the former to bring unemployment back to its original level.

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Hysteresis and Instability in the Natural Rate of Unemployment

Cited by 40 publications

References 27 publications

The nature of occupational unemployment rates in the United States: hysteresis or structural?

The nature of occupational unemployment rates in the United States: hysteresis or structural?

New Economy, Old Central Banks?

Multiple shifts and fractional integration in the US and UK unemployment rates

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