Hysteresis in Unemployment and Jobless Recoveries

Dmitry Plotnikov

No 2014/077, IMF Working Papers from International Monetary Fund

Abstract: This paper develops and estimates a general equilibrium rational expectations model with search and multiple equilibria where aggregate shocks have a permanent effect on the unemployment rate. If agents' wealth decreases, the unemployment rate increases for a potentially indefinite period. This makes unemployment rate dynamics path dependent as in Blanchard and Summers (1987). I argue that this feature explains the persistence of the unemployment rate in the U.S. after the Great Recession and over the entire postwar period.

Keywords: WP; real wage; Unemployment; hysteresis; business cycles; sunspots; TFP shock; production function; confidence interval; TFP series; depreciation rate; TFP fluctuation; productivity shock; Unemployment rate; Employment; Real wages; Consumption (search for similar items in EconPapers)
Pages: 37
Date: 2014-05-06
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Citations: View citations in EconPapers (2)

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