Unemployment, Growth and Fiscal Policy: New Insights on the Hysteresis Hypothesis

Xavier Raurich, Hector Sala and Valeri Sorolla

No 1127, IZA Discussion Papers from Institute of Labor Economics (IZA)

Abstract: We develop a growth model with unemployment due to imperfections in the labor market. In this model, wage inertia and balanced budget rules cause a complementarity between capital and employment capable of explaining the existence of multiple equilibrium paths. Hysteresis is viewed as the result of a selection between these different equilibrium paths. We use this model to argue that, in contrast to the US, those fiscal policies followed by most of the European countries after the shocks of the 1970's may have played a central role in generating hysteresis.

Keywords: fiscal policy; unemployment; economic growth; multiple equilibria; hysteresis (search for similar items in EconPapers)
JEL-codes: E24 E62 O41 (search for similar items in EconPapers)
Pages: 41 pages
Date: 2004-04
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Citations: View citations in EconPapers (20)

Published - published in: Macroeconomic Dynamics, 2006, 10 (3), 285-316

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Related works:
Journal Article: UNEMPLOYMENT, GROWTH, AND FISCAL POLICY: NEW INSIGHTS ON THE HYSTERESIS HYPOTHESIS (2006)
Working Paper: Unemployment, growth and fiscal policy: new insights on the hysteresis hypothesis (2005)
Working Paper: Unemployment, growth and fiscal policy: new insights on the hysteresis hypothesis (2004)
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