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Hysteresis in unemployment: Evidence from OECD estimates of the natural rate

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  • Laurence Ball
  • Joern Onken

Abstract

This paper studies the dynamics of unemployment (u) and its natural rate (u*), with u* measured by real‐time estimates for 29 countries from the Organization for Economic Cooperation and Development. We find strong evidence of hysteresis: an innovation in u causes u* to change in the same direction, and therefore has permanent effects. For our baseline specification, a one‐percentage‐point deviation of u from u* for 1 year has a long‐run effect of 0.16 points on both variables. When we allow asymmetry, we find, perhaps surprisingly, that decreases in u have larger long‐run effects than increases in u.

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  • Laurence Ball & Joern Onken, 2022. "Hysteresis in unemployment: Evidence from OECD estimates of the natural rate," International Finance, Wiley Blackwell, vol. 25(3), pages 268-284, December.
    • Handle: RePEc:bla:intfin:v:25:y:2022:i:3:p:268-284
    DOI: 10.1111/infi.12424
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    Cited by:

    1. Davide Romaniello, 2022. "Unemployment gap, isteresi e disoccupazione di lunga durata: quale ruolo nella comprensione dell'inflazione? (Unemployment gap, hysteresis and long-term unemployment: which role in explaining inflatio," Moneta e Credito, Economia civile, vol. 75(299), pages 267-283.
    2. Di Domenico, Lorenzo & Gahn, Santiago José & Romaniello, Davide, 2024. "Testing the Waters of Positive Hysteresis: The Effects of Autonomous Demand Shocks on Inflation, Accumulation, and Labor in the US Economy," Centro Sraffa Working Papers CSWP64, Centro di Ricerche e Documentazione "Piero Sraffa".
    3. Gökten, Meryem & Heimberger, Philipp & Lichtenberger, Andreas, 2024. "How far from full employment? The European unemployment problem revisited," European Economic Review, Elsevier, vol. 164(C).
    4. Bruna Santos & Leonardo Costa & Francisca Guedes de Oliveira, 2024. "The Euro Area 12: A Comparative Assessment of Its Member States in the Period 1998–2022," Economies, MDPI, vol. 12(4), pages 1-22, April.
    5. Javier G. Gómez-Pineda & Julián Roa-Rozo, 2023. "A trend-cycle decomposition with hysteresis," Borradores de Economia 1230, Banco de la Republica de Colombia.
    6. Paternesi Meloni, Walter & Romaniello, Davide & Stirati, Antonella, 2022. "Inflation and the NAIRU: assessing the role of long-term unemployment as a cause of hysteresis," Economic Modelling, Elsevier, vol. 113(C).
    7. Roa Rozo, Julián, 2024. "Is there hysteresis in potential output estimates?," Economics Letters, Elsevier, vol. 234(C).

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    More about this item

    JEL classification:

    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity

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