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.