Hysteresis Phenomena and the U/V Curve

Abstract

Hysteresis phenomena have received renewed attention within the context of an explanation of the persistence of European unemployment; there is a large volume of theoretical and empirical literature on this problem (for an overview, see Emprical Economics Vol 14. and Möller, 1990). Hysteresis occurs when a fall in demand is accompanied — or followed — by adverse changes in mismatch, search effectiveness and other structural effects which persist for a longer time than the initial demand shock. In the context of unemployment the hysteresis debate has been especially stimulated by a series of papers by Blanchard and Summers (1986 and 1987). The analytical problems are evidenced by the fact that empirical estimates of the non accelerating inflation rate of unemployment (NAIRU) seem to follow the actual path of unemployment rather closely (see e.g. Coe 1985, Solow 1986, Franz, 1987, Blanchard/Summers 1987, Pichelmann, 1990). This finding was also obtained for estimates of the natural rate by U/V analysis (Christi, 1987). Thus the hysteresis phenomenon is another explanation of outward shifts in the Beveridge curve.