Unemployment hysteresis in the Czech Republic

• Název práce v češtině: Hystereze nezaměstnanosti v České republice
• Název v anglickém jazyce: Unemployment hysteresis in the Czech Republic
• Klíčová slova: Hystereze, NAIRU, Phillipsova křivka, modely ve stavovém tvaru, nezaměstnanost
• Klíčová slova anglicky: Hysteresis, NAIRU, Phillips curve, state space models, unemployment
• Akademický rok vypsání: 2014/2015
• Typ práce: diplomová práce
• Jazyk práce: angličtina
• Ústav: Institut ekonomických studií (23-IES)
• Vedoucí / školitel: PhDr. Jaromír Baxa, Ph.D.
• Řešitel: skrytý - zadáno vedoucím/školitelem
• Datum přihlášení: 01.06.2015
• Datum zadání: 01.06.2015
• Datum a čas obhajoby: 23.06.2016 09:00
• Místo konání obhajoby: IES
• Datum odevzdání elektronické podoby: 10.05.2016
• Datum proběhlé obhajoby: 23.06.2016
• Oponenti: PhDr. Kateřina Pavloková

Zásady pro vypracování

Standard macroeconomic theory usually assumes that the aggregate unemployment rate can be decomposed into the cyclical unemployment rate (determined by the aggregate demand) and into the equilibrium unemployment (determined by the structural factors, independently on the aggregate demand). On the other hand, the unemployment hysteresis theory formulated by Blanchard and Summers (1986) states, that changes in the cyclical unemployment may directly affect the equilibrium unemployment. According to this theory, purely transitory shocks have permanent effects and thus the aggregate demand affects the long run equilibrium.
The unemployment hysteresis brings interesting implications also for practical economic policy. For example Ball (1999) argues that a high equilibrium unemployment rates in some of the OECD countries during 1990s were a result of an inappropriately conducted disinflationary policies during 1980s and of the hysteresis mechanism. More generally, Ball (1999) claims that a passive macroeconomic policy during a recession has a high cost: not only temporary, bud permanently higher unemployment. And Kapadia (2005) shows that the similar policy implications can be obtained also within a standard New Keynesian monetary policy model, once it incorporates the hysteresis effects.
Therefore I think that investigation of the unemployment hysteresis mechanism and its intensity is an interesting and important topic for both economic theory and policy. From a theoretical point of view, the hysteresis theory challenges the classical dichotomy - separation of the real and nominal forces in the economy. And from a practical point of view, the unemployment hysteresis allows for the long-run non-neutrality of the monetary policy.

Seznam odborné literatury

BALL, Laurence. Aggregate demand and long-run unemployment. Brookings papers on economic activity, 1999, 189-236.
EINARSSON, Bjarni G.; SIGURDSSON, Jósef. How "Natural" is the Natural Rate? Unemployment Hysteresis in Iceland. Economics wp64, Department of Economics, Central bank of Iceland, 2013.
BLANCHARD, Olivier J.; SUMMERS, Lawrence H. Hysteresis and the European unemployment problem. In: NBER Macroeconomics Annual 1986, Volume 1. Mit Press, 1986. p. 15-90.
GORDON, Robert J. The Time-Varying NAIRU and Its Implications for Economic Policy. Journal of Economic Perspectives, 1997, 11.1: 11-32.
JAEGER, Albert; PARKINSON, Martin. Some evidence on hysteresis in unemployment rates. European Economic Review, 1994, 38.2: 329-342.
KAPADIA, Sujit. Optimal Monetary Policy under Hysteresis. Economics Series Working Papers 250, University of Oxford, Department of Economics, 2005.
LOGEAY, Camille; TOBER, Silke. Hysteresis and the NAIRU in the Euro Area. Scottish Journal of Political Economy, 2006, 53.4: 409-429.

Předběžná náplň práce

Research questions:

1. Is the unemployment rate in the Czech Republic evolving accordingly to the unemployment hysteresis theory? If yes, then how strong is the hysteresis in the Czech Republic?
2. Is the unemployment rate in the Euro Area evolving accordingly to the unemployment hysteresis theory? Is hysteresis stronger in the Czech Republic or in the Euro Area?
3. Through which channel does the unemployment hysteresis in the Czech Republic and in the Euro Area work? Is hysteresis caused by long-term unemployment and depreciation of human capital?

In my thesis I would like to adopt an unobserved components approach and the Kalman filter technique (state-space modelling), in the hysteresis literature firstly applied by Jaeger and Parkinson (1994). In this approach, the observed unemployment rate is decomposed into the equilibrium component and the cyclical component. Hysteresis effect is introduced by a lagged effect of the cyclical unemployment on the equilibrium unemployment rate. Then we can test the statistical significance of this lagged effect of the cyclical unemployment and thus of the hysteresis in the Czech Republic and in the Euro Area. And the size of this lagged effect measures the strength of the hysteresis mechanism. The proposed unobserved components model is generally not identified and I will use one of the following approaches to test the first and the second hypothesis: Jaeger and Parkinson (1994) used a version of Okun’s law to identify the model; for example Logeay and Silke (2006) used a Phillips curve relationship from the Gordon’s (1997) Triangle model of inflation.
The tests of my third hypothesis will be based on the paper written by Einarsson and Sigurdsson (2013), who proposed several models which distinguish among different hysteresis channels. One of them, based on the idea that the long-term unemployed have weaker influence on the wage bargaining, then allows for an indirect test of the depreciation of human capital hysteresis hypothesis, again within the Gordon’s (1997) Triangle model of inflation.
I will work with the aggregate time series in my thesis. Data for the Euro Area will be taken from the database of the ECB’s Area Wide Model; they are on a quarterly basis and cover period from 1970. Quarterly time series for the Czech Republic will be primarily taken from the Czech Statistical Office. An additional resource which I will probably use is Eurostat.

Expected contribution
My thesis will be empirical and focused on the Czech Republic. The Euro Area data will be modelled primarily for comparison with the Czech Republic’s results, because a lot of the methods and models which I am going to use were recently applied by Logeay and Silke (2006), who used the Euro Area data as well. On the other hand I think that my thesis can bring a new contribution to the literature investigating the Czech Republic. Until now, almost all of the authors who investigated the hysteresis in the Czech Republic have used the unit root tests approach, which can only hardly deal with the structural changes in the equilibrium unemployment. Secondly, the unit root approach does not provide a measure of the strength of the hysteresis mechanism and can’t identify the channels through which the hysteresis works. The state-space models which I am going to use can solve all these problems of the unit root approach and thus can bring a new insight on the hysteresis mechanism in the Czech Republic.

Předběžná náplň práce v anglickém jazyce

1. Introduction
2. Theory of the unemployment hysteresis - comparison of different causes and sources of the hysteresis
3. Review of the empirical literature for the Czech Republic and the Euro Area
4. Empirical methodology - description of the methods and models which I will use, comparison with another approaches
5. Estimation of the models – is there any hysteresis, how strong and what are its sources?
6. Implications for the economic policy
7. Conclusions