DP1334 Hysteresis and Economic Fluctuations (Spain, 1970-94)
|Author(s):||Juan J. Dolado, J David López-Salido|
|Publication Date:||February 1996|
|Keyword(s):||Hysteresis, Recessions, Shocks, Structural VAR|
|JEL(s):||C32, E32, J23|
|Programme Areas:||Human Resources|
|Link to this Page:||cepr.org/active/publications/discussion_papers/dp.php?dpno=1334|
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.