Unemployment hysteresis and capacity

Working paper

This paper examines an open economy model in which equilibrium unemployment depends on capacity in the traded-goods sector. The model is estimated using U.K. quarterly data and compared with alternative concepts of equilibrium unemployment based on labour market variables (as in Layard and Nickell, 1986) or on the price of oil and the real interest rate (as in Carruth, Hooker and Oswald, 1998). The capacity model displays a non-linear hysteresis mechanism through which capacity utilisation and the degree of volatility of the real exchange rate interact to generate changes in equilibrium unemployment. This is modelled as logistic smooth transition autoregressive (LSTAR) process.

Authors: O'Shaughnessy, T

• Publication status: Published
• Publisher: University of Oxford
• Series: Department of Economics Discussion Paper Series
• Publication date: 2001-10-01
• Paper number: 82
• Keywords: real exchange rate; smooth transition; unemployment; capacity; hysteresis