Keynesian Theories of Hysteresis
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Publication date: 2004-11-25
GNPJE 2004;196(11-12):49-68
In the 1980s, a very sharp rise in unemployment rates was recorded in Europe. In accordance with the dominating monetarist view, that phenomenon was explained by the impact of real factors, like trade union activity and increased financial protection of the unemployed. By the same token, a thesis that demand-related factors were irrelevant and having only a short-term effect on unemployment was advocated Nevertheless, numerous empirical studies did not confirm the occurrence of sudden adverse changes to real factors blamed for labour market developments in Europe Consequently, neo-keynesianists came up with a supposition that the NAIRU - the non-accelerating inflation rate of unemployment (or the natural rate) may depend on past levels of the market equilibrium rate. This way the concept of hysteresis has been devised, according to which the NAIRU (the natural rate) may change not only and exclusively due to the impact of real factors, but also due to aggregate demand fluctuations.
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