Eastern Economic Journal

, Volume 44, Issue 2, pp 305–322 | Cite as

Hysteresis in a Three-Equation Model

  • Thomas R. MichlEmail author


This paper introduces two post-Keynesian hysteresis mechanisms into a standard textbook three-equation model. The mechanisms work through wage bargaining and price setting. Workers are assumed to change their wage aspirations when the actual wage differs from their target wage, and firms are assumed to change their mark-up norm when the actual profit share differs from their target share. These mechanisms do not themselves guarantee hysteresis. A pure inflation shock will create hysteresis even if expectations are anchored to the central bank’s inflation target. After a demand shock, if inflation expectations are not anchored, these mechanisms generate persistence but not true hysteresis. But if expectations are partially (as they seem to be) or fully anchored, a demand shock will have a permanent effect on output, employment, and the real wage, because in this case the central bank is not obligated to reflate as aggressively in order to manage expectations. Hysteresis effects may explain the absence of disinflation and the fall in the wage share in the aftermath of Global Financial Crisis.


Hysteresis Three-equation model Path dependence Inflation-expectations anchoring 

Mathematics Subject Classification

E11 E12 O42 


  1. Akerlof, George A., William T. Dickens, and George L. Perry, “The Macroeconomics of Low Inflation,” Brookings Papers on Economic Activity, 1996, (1), 1–76.CrossRefGoogle Scholar
  2. Amable, Bruno, Jerome Henry, Frederic Lordon, and Richard Topol, “Unit Root in the Wage-Price Spiral is Not Hysteresis in Unemployment,” Journal of Economic Studies, April 1993, 20 (1-2), 123–135.Google Scholar
  3. Ball, Laurence, “Aggregate Demand and Long-Run Unemployment,” Brookings Papers on Economic Activity, 1999, (2), 189–236.CrossRefGoogle Scholar
  4. Brayton, Flint, Thomas Laubach, and David Reifschneider, Optimal-Control Monetary Policy in the FRB/US Model Board of Governors of the Federal Reserve System November 21 2014. FEDS Notes.Google Scholar
  5. Carlin, Wendy and David Soskice, Macroeconomics: Imperfections, Institutions, and Policies, Oxford: Oxford University Press, 2006.Google Scholar
  6. Carlin, Wendy and David Soskice, Macroeconomics: Institutions, Instability and the Financial System, Oxford: Oxford University Press, 2015.Google Scholar
  7. Dutt, Amitava K., Equilibrium, path dependence and hysteresis in post-Keynesian models, in Philip Arestis and Malcolm Sawyer, eds., Essays in Honour of G. C. Harcourt: Markets, Unemployment and Economic Policy, Vol. 2, London: Routledge, 1997, pp. 238–253.Google Scholar
  8. Elaydi, Saber, An Introduction to Difference Equations, New York: Springer, 2005.Google Scholar
  9. Figura, Andrew and David Ratner, The Labor Share of Income and Equilibrium Unemployment Board of Governors of the Federal Reserve System June 8 2015. FEDS Notes.Google Scholar
  10. Gandolfo, Giancarlo, Economic Dynamics: Study Edition, Berlin: Springer-Verlag, 1997.Google Scholar
  11. International Monetary Fund, World Economic Outlook: Hopes, Realities, Risks, Washington: IMF, April 2013.Google Scholar
  12. Kiley, Michael T., Low Inflation in the United States A Summary of Recent Research Board of Governors of the Federal Reserve System November 23 2015. FEDS Notes.Google Scholar
  13. Lavoie, Marc, Post-Keynesian Economics: New Foundations, Northhampton MA: Edward Elgar, 2014.Google Scholar
  14. Layard, Richard and Steven Nickell, “Unemployment in Britain,” Economica, May 1986, 53 (210), S121–S169.CrossRefGoogle Scholar
  15. Lindbeck, Assar and Dennis J. Snower, “Wage Setting, Unemployment, and Insider-Outsider Relations,” American Economic Review, May 1986, 76 (2), 235–239.Google Scholar
  16. Rowthorn, Robert, “Unemployment, Wage Bargaining and Capital-Labour Substitution,” Cambridge Journal of Economics, July 1999, 23 (4), 413–425.CrossRefGoogle Scholar
  17. Skott, Peter, “Fairness as a Source of Hysteresis in Employment and Wages,” Journal of Economic Behavior and Organization, June 2005, 57 (2), 305–331.CrossRefGoogle Scholar
  18. Soskice, David and Wendy Carlin, “Medium Run Keynesianism: Hysteresis and Capital Scrapping,” in P. Davidson and J. Kregel, eds., Macroeconomic Problems and Policies of Income Distribution, Aldershot, U.K.: Edward Elgar, 1989, pp. 241–255.Google Scholar
  19. Stockhammer, Engelbert, “Is the NAIRU Theory a Monetarist, New Keynesian, Post Keynesian or a Marxist Theory?,” Metroeconomica, June 2008, 59 (3), 479–510.CrossRefGoogle Scholar
  20. Stockhammer, Englebert, “Wage Norms, Capital Accumulation, and Unemployment: A Post-Keynesian View,” Oxford Review of Economic Policy, Summer 2011, 27 (2), 295–311.CrossRefGoogle Scholar
  21. Taylor, John B., Discretion Versus Policy Rules in Practice Carnegie-Rochester Conference Series on Public Policy 1993.Google Scholar
  22. Taylor, Lance, Reconstructing Macroeconomics: Structuralist Proposals and Critiques of the Mainstream, Cambridge, MA: Harvard University Press, 2004.Google Scholar

Copyright information

© EEA 2016

Authors and Affiliations

  1. 1.Department of EconomicsColgate UniversityHamiltonUSA

Personalised recommendations