Working Paper: CEPR ID: DP1334
Authors: Juan J. Dolado; J. David López-Salido
Abstract: 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.
Keywords: structural VAR; hysteresis; shocks; recessions
JEL Codes: C32; E32; J23
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| aggregate demand shocks (E00) | output (C67) |
| aggregate demand shocks (E00) | unemployment (J64) |
| labor supply shocks (J20) | unemployment (J64) |
| aggregate demand shocks (E00) | rising trend of unemployment (J64) |
| labor demand shocks (J23) | real wages (J31) |
| labor demand shocks (J23) | unemployment (J64) |
| unemployment (J64) | long-run reduction in unemployment (J68) |
| labor supply shocks (J20) | short-term unemployment fluctuations (J64) |
| aggregate demand shocks (E00) | long-term unemployment trends (J64) |