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Unemployment as a Target for Central Banks? The Case of Hysteresis

Ansgar Belke

Credit and Capital Markets, 2018, vol. 51, issue 4, 587-620

Abstract: One of the most interesting questions for policymakers to have emerged from the financial crisis deals with the strength of links between the demand and supply sides of the economy. The classical view - that only cyclical policies influence the former, and structural policies the latter - has been challenged in two ways: first, by the observation that long periods of weak demand can lead to rising structural unemployment and a permanently lower capital stock – the so-called hysteresis effects; and second, by the corollary suggestion that stronger demand fueled, for instance, by monetary policy might be able to reverse such effects. However, the Blanchard and Summers type of hysteresis approach should not be taken literally and transformed one-to-one into recommendations for monetary policy. Merely referring to the hard form of “reverse hysteresis” and calling for bold counter-cyclical monetary (and fiscal) policies to cope with hysteretic unemployment is neither necessary nor sufficient. Instead, subtler forms of hysteresis should be taken into account. They indeed leave some room for monetary policy to maneuver, but in a much more complex way. If long-term unemployment is stagnating, even a contractionary monetary policy stance would be optimal.

Keywords: Monetary policy; inflation; unemployment; structural reforms; hysteresis; Phillips curve (search for similar items in EconPapers)
JEL-codes: E24 E42 E52 (search for similar items in EconPapers)
Date: 2018
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Handle: RePEc:kuk:journl:v:51:y:2018:i:4:p:587-620