Working Paper: NBER ID: w14818
Authors: Laurence M. Ball
Abstract: This paper argues that hysteresis helps explain the long-run behavior of unemployment. The natural rate of unemployment is influenced by the path of actual unemployment, and hence by shifts in aggregate demand. I review past evidence for hysteresis effects and present new evidence for 20 developed countries. A central finding is that large increases in the natural rate are associated with disinflations, and large decreases with run-ups in inflation. These facts are consistent with hysteresis theories and inconsistent with theories in which the natural rate is independent of aggregate demand.
Keywords: Hysteresis; Unemployment; NAIRU; Aggregate Demand; Inflation
JEL Codes: E24
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| aggregate demand shifts (E00) | actual unemployment (J64) |
| actual unemployment (J64) | NAIRU (E24) |
| large increases in NAIRU (E24) | disinflations (E31) |
| large decreases in NAIRU (E31) | inflation runups (E31) |
| actual unemployment rises above NAIRU (J64) | NAIRU pulls upward (J69) |
| inadequate monetary policy responses (E65) | persistent high unemployment (J64) |
| actual unemployment (J64) | NAIRU through hysteresis channels (J69) |