Hysteresis and Economic Fluctuations (Spain, 1970-94)

Juan Dolado and David Lopez-Salido

No 1334, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: This paper uses long-run restrictions on a three-variable system containing output growth, real wage growth and the differenced unemployment rate, to isolate three 'structural' shocks which drove business cycle fluctuations in Spain during 1970-94. These shocks are interpreted as aggregate demand, labour demand and labour supply disturbances in a framework where there is unit-root persistence in the unemployment rate. Our basic finding is that disinflationary policies in an economy suffering from high persistence can become very costly in terms of unemployment, unless supply-side reforms, aimed at eliminating the sources of persistence, are implemented.

Keywords: Hysteresis; Recessions; Shocks; Structural VAR (search for similar items in EconPapers)
JEL-codes: C32 E32 J23 (search for similar items in EconPapers)
Date: 1996-02
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