Discussion paper

DP1334 Hysteresis and Economic Fluctuations (Spain, 1970-94)

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.

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Citation

Dolado, J and J López-Salido (1996), ‘DP1334 Hysteresis and Economic Fluctuations (Spain, 1970-94)‘, CEPR Discussion Paper No. 1334. CEPR Press, Paris & London. https://cepr.org/publications/dp1334