The Effect of Hysteresis on Fluctuations in Unemployment and Inflation when Inflation Expectations are Adaptive

The recent level of unemployment may affect the natural rate of unemployment. The implications of such an hysteresis effect for macroeconomic fluctuations is analyzed using a stochastic dynamic model. The greater the importance of an hysteresis effect, the more pronounced are fluctuations in unemployment and inflation. Complete hysteresis causes the economy to be unstable.     

Inflation, Unemployment and the NAIRU in Australia

In this paper we investigate the relationship between inflation and unemployment in Australia, post 1959. Our approach is based on identification of the time series components of the data. Evidence is found of significant correlations between the non-trend frequencies of inflation and unemployment and these correlations are exploited to estimate a simple forecasting model that does not suffer from the instability normally associated with the Phillips Curve. Estimates of the NAIRU are also provided and these range from as low as 2.3 per cent to as high as 9.2 per cent over this period, but these estimates are quite imprecise. Reasons for this imprecision are discussed.     

Inflation and Unemployment in General Equilibrium*

When labor is indivisible, there exist efficient outcomes with some agents randomly unemployed, as in Rogerson (1988) . We integrate this idea into the modern theory of monetary exchange, where some trade occurs in centralized markets and some in decentralized markets, as in Lagos and Wright (2005) . This delivers a general equilibrium model of unemployment and money, with explicit microeconomic foundations. We show that the implied relation between inflation and unemployment can be positive or negative, depending on simple preference conditions. Our Phillips curve provides a long‐run, exploitable, trade‐off for monetary policy; it turns out, however, that the optimal policy is the Friedman rule.     

A Search Model of Unemployment and Inflation*

This paper introduces money into the standard labor‐matching model. A double‐coincidence problem makes money necessary as a medium of exchange. In the long run, a rise in the growth rate of money leads to higher inflation and higher unemployment, such that the long‐run Phillips curve is not vertical. The optimal monetary growth rate decreases with greater worker bargaining power, the level of unemployment benefits, and the payroll tax rate.     

The Inexorable and Mysterious Tradeoff Between Inflation and Unemployment

This paper discusses the short-run tradeoff between inflation and unemployment. Although this tradeoff remains a necessary building block of business cycle theory, economists have yet to provide a completely satisfactory explanation for it. According to the consensus view among central bankers and monetary economists, a contractionary monetary shock raises unemployment, at least temporarily, and leads to a delayed and gradual fall in inflation. Standard dynamic models of price adjustment, however, cannot explain this pattern of responses. Reconciling the consensus view about the effects of monetary policy with models of price adjustment remains an outstanding puzzle for business cycle theorists.     

Unemployment Hysteresis in the US States and the EU: A Panel Approach

This paper applies the panel unit root test proposed by Im, Pesaran and Shin (1997) to test for unemployment hysteresis in the US states and the EU countries against the alternative of a natural rate. The results show that hysteresis for the EU and the natural rate for the US states are the most plausible hypotheses.     

How Will EMU Affect Inflation and Unemployment in Europe?

This paper explores how European Monetary Union will change the wage setting behavior of national labor unions. We derive the impact of national inflation aversion and labor militancy on the performance of national labor markets under different monetary arrangements. A common central bank raises inflation and unemployment if it acts as conservatively as national central banks. However, unemployment falls in countries that previously tied their monetary policy to the Bundesbank. We also examine the composition of EMU and the influence of national labor market legislation.
JEL Classification : E 24; F 02; F 33     

Unemployment Hysteresis in Transition Countries: Evidence using Stationarity Panel Tests with Breaks

The authors test hysteresis versus the natural rate hypothesis in unemployment using panel data for transition countries covering the period 1991:1–2003:11. The advantages of the stationarity tests applied is that they exploit the cross-section variations of the series and, additionally, allow for a different number of endogenous breakpoints in the unemployment series. They do not impose independence on the panel members, so that the critical values are simulated based on their specific panel sizes and time periods. The findings stress the importance of accounting for exogenous shocks in the series and give support to the shifting natural-rate hypothesis of unemployment for all the countries analyzed.     

Inflation in the Transition Economies: the post-Keynesian view

The notion that hostile takeovers must play a key role in corporate governance, by bringing purportedly efficient financial market pressures to bear on poorly performing managers, often underlies proposals for financial sector reform. This paper tests the most influential explanation of takeovers, the free cash flow theory of debt-financed restructuring, against a comprehensive sample of large U.S. hostile takeovers from the years 1978‐89. The tests provide little support for the free cash flow hypothesis: that over-retention of corporate resources, relative to investment opportunities, would distinguish targets from other companies. Firms with less debt are more likely to have been taken over. But this and closely related evidence is more consistent with the idea that the takeover and credit markets underwent a period of speculative overheating. Thus the role played by hostile takeovers in the corporate restructuring of the 1980s does not suggest that facilitating such activity should be a goal of present day financial reforms, in Europe or elsewhere     

The colonization of the future: An alternative view of financialization and its portents

Financialization is generally interpreted by heterodox economists to be a dysfunctional and thus historically transient outgrowth of contemporary capitalism: dysfunctional because it is seen to be driven by attempts to escape production and profit realization constraints in the real economy, transient because these attempts are seen to be ultimately futile. This article proposes the contrary argument that financialization is a functionally useful feature of contemporary capitalism that is entirely in keeping with the latter’s continuing development as a commodity system. Specifically, it will be argued that just as globalization represents the extension of the commodity principle along the axis of geographical space, financialization represents the extension of this same principle along the axis of time: the future is being colonized so as to make it take the overspill of the pressures on organizations operating in the present.     

Unemployment Hysteresis in Australian States and Territories: Evidence from Panel Data Unit Root Tests

This article tests for hysteresis by applying panel data unit root tests to quarterly unemployment rates for Australian states and territories between 1982:2 and 2002:1. Panel tests proposed by Levin and Lin (1992) using ordinary least squares and O'Connell (1998) using feasible generalised least squares (which assume that under the alternative hypothesis of stationarity, all labour markets revert to the natural rate at the same speed) provide evidence in support of the natural rate hypothesis. However, the panel test proposed by Im, Pesaran and Shin (1997), which does not assume that all cross‐sectional units converge towards the equilibrium value at the same speed under the alternative and is therefore less restrictive than the other two panel tests, finds evidence of hysteresis. Given the advantages of the Im et al. (1997) test over the other two panel tests the results can be interpreted as being consistent with the existence of hysteresis in unemployment     

Insider Power as a Source of Hysteresis in Unemployment: Tests with Australian Data

This paper reports the results of an empirical investigation of hysteresis in the unemployment rate using Australian data for 1966(3)-1988(4). It is found that there is not hysteresis in the strict sense of the irrelevance of the natural unemployment rate although there is strong evidence of insider power in the wage-fixing process. There is no evidence that the Accord changed the extent of the influence of insider power on wage setting.     

Inflation and growth: An empirical note

In time series modelling, concepts of causality and co-integrability are relevant. This note examines the growth–inflation relationship using Jamaican data. The existence of a long-run relationship is found to be tenuous.     

A Time Series Analysis of the Relationship between Inflation Uncertainty and Unemployment

This paper examines the empirical relationship between inflation uncertainty and unemployment rates. We find supportive evidence of a significant positive association between inflation uncertainty and unemployment, but this relationship depends critically on three factors. First, the inflation uncertainty-unemployment relationship is not significant before the mid-1970s. Second, the inflation uncertainty-unemployment relationship does not hold across all single digit SIC industries. And third, the inflation uncertainty-unemployment relationship is concentrated at business cycle and long-run components of the data, rather than high-frequency components.