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The Effect of Hysteresis on Fluctuations in Unemployment and Inflation when Inflation Expectations are Adaptive
Author(s) -
Smyth David J.
Publication year - 1999
Publication title -
pacific economic review
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.34
H-Index - 33
eISSN - 1468-0106
pISSN - 1361-374X
DOI - 10.1111/1468-0106.00061
Subject(s) - hysteresis , economics , unemployment , inflation (cosmology) , keynesian economics , natural rate of unemployment , misery index , monetary economics , adaptive expectations , full employment , macroeconomics , unemployment rate , physics , rational expectations , condensed matter physics , theoretical physics
The recent level of unemployment may affect the natural rate of unemployment. The implications of such an hysteresis effect for macroeconomic fluctuations is analyzed using a stochastic dynamic model. The greater the importance of an hysteresis effect, the more pronounced are fluctuations in unemployment and inflation. Complete hysteresis causes the economy to be unstable.