Working Paper: CEPR ID: DP16535
Authors: Antonio Fatas
Abstract: During the expansion phase of the business cycle unemployment declines towards levels that are usually associated to the natural rate of unemployment. Unfortunately, those low levels of unemployment are short lived. In the last 60 years, the US has not witnessed a long period of stable and low unemployment. We argue that this result is consistent with an asymmetric view of the business cycles (as in Friedman’s plucking model) where many expansions are unfinished business, they end too early. The speed of labor market recovery is too slow and before the economy reaches full employment a recession starts, either because of imbalances or bad luck. Our analysis has implications for how we think about labor market slack and potential output. From a policy perspective it calls for a focus on faster recoveries while avoiding the type of imbalances that can be the seed of the next crisis.
Keywords: Potential Output; Business Cycles; Natural Rate of Unemployment; Recoveries
JEL Codes: E32; J0
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| low unemployment (J68) | increased probability of recession (E32) |
| low unemployment (J68) | sharp increases in unemployment (J64) |
| macroeconomic imbalances (F41) | increased risk of recession (F44) |
| low unemployment (J68) | trigger recessions (E32) |
| low unemployment (J68) | future increases in unemployment (J64) |