Prague Economic Papers HYSTERESIS AND THE NAIRU: DOI: 10.18267/j.pep.526 THE CASE OF COUNTRIES Accepted: 25. 6. 2014 IN TRANSITION Published: 20. 7. 2015

Gordana Marjanovic, Ljiljana Maksimovic,1Nenad Stanisic*

Abstract: The paper examines the hysteresis hypothesis in unemployment in the case of eight selected countries in transition, using the Kalman fi lter and testing whether the NAIRU time series are ONLINE FIRST ONLINE

stationary. The empirical results show that the hysteresis eff ect is confi rmed for the majority of the countries. Testing the infl uence of the infl ation growth rate on the decline in the NAIRU and / vice versa, performed using the panel regression with fi xed eff ect, confi rmed that the increase in infl ation leads to decline in the NAIRU. The conclusion also suggests the existence of the impact of actual unemployment rate on the NAIRU, which may be aff ected by the change in aggregate demand.

Keywords: hysteresis, NAIRU, Kalman fi lter, infl ation, unemployment. JEL Classifi cation: E24, E30, E50, C13

1. Introduction Unemployment is a major problem, both in developed market economies, and countries that have gone through the transitional changes. Therefore, the goal of economic policy in modern economies is to reduce unemployment and thereby to avoid the rising infl a- tionary pressures. In achieving this goal, the concept of Non - Accelerating Infl ation Rate of Unemployment (NAIRU) and policy recommendations arising from this concept are of great importance. NAIRU concept was fi rst introduced by Modigliani and Papademos in 1975 (Snowdon, Vane, 2005, p. 402). Among economists, there are signifi cant discrepancies in the defi nitions of the concepts of natural rate of unemployment (NRU), which was founded by Nobel Laureate M. Friedman, and the NAIRU. One group of scholars considers them identical (Gordon, Blanchard), while others argue that these are different

PRAGUE ECONOMIC PAPERS PAPERS ECONOMIC PRAGUE concepts (Tobin, Stiglitz). The signifi cant difference between the NRU and NAIRU relates to their different microeconomic basis. NRU concept implies market clearing, while the NAIRU refers to imperfect competition in labour and product markets. NAIRU is the unemployment rate with which the infl ationary processes in excess demand markets are balanced with the disinfl ationary processes in excess supply markets. NAIRU can be defi ned under the different infl ation rates, and at different rates of unemployment, and it responds to those conditions in the economy which allow stable rate of infl ation. In contrast to the NRU, which implies that all markets are in equilibrium, NAIRU points out that not all markets have to be in balance.

* 1 Gordana Marjanovic, Faculty of Economics, University of Kragujevac, Serbia; Ljiljana Maksimovic, Faculty of Economics, University of Kragujevac, Serbia; Nenad Stanisic, Faculty of Economics, University of Kragujevac, Serbia ([email protected]).

© UNIVERSITY OF ECONOMICS, PRAGUE 1 ONLINE FIRST on theassumptionthatin expectations-augmented Phillipscurve,whichincludesthe conceptofNAIRU,isbased rate, whichisrepresentedbythePhillipscurve,should bementioned. The variantof U the relationshipbetweenmovementsofNAIRUrate andchangesinthe decrease intheNAIRU. policy whoseeffect onthereductioninactualunemploymentratecanresult changes intheNAIRU.Endogenousapproachattaches moreimportancetoeconomic able intheshortrunbutlonghigherorlower economicactivityleadstothe direction. The argument thataggregate demanddoesnotaffect theNAIRUcanbeaccept- ing theactualunemploymentrateactsasamagnetthat«draws» theNAIRUinsame bene If weassumethatb b U Where U Where which canberepresentedasfollows(Snowdon, Vane, 2005,p.405): period ifinthepreviousactualunemploymentratewashigherthanNAIRU, Summers, 1988). The hysteresistheoryargues thattheNAIRUisgrowing in thecurrent the actualunemploymentrate,whichisbasisofhysteresistheory(Blanchardand tion (Sørensen& Whitta-Jacobsen, 2010,p.341). solution tothisprobleminlabourmarketderegulationandunemploymentbene cause ofrisingunemploymentinEuropeancountries. The exogenousapproach which in the labourmarket. This approachemphasizesthattheNAIRUisaresultofthesefactors, legislation, insider-outsider structures, bargaining poweroftradeunions,institutionalarrangements,unemploymentbene approaches tothefactorsthatdetermineNAIRU:exogenousandendogenousones. factors thatdeterminethelevelandchangeofNAIRU.Onecandistinguishtwo macroeconomic theory, thereisconsiderabledisagreementandcontroversyaboutthe Drydakis, 2011, pp.15–16): the NAIRU,and rate isequaltotheNAIRU; it willincreasewhentheactualunemploymentfallsbelow PRAGUE ECONOMIC PAPERS In additiontotherelationshipbetweenNAIRUand actualunemploymentrate, According totheendogenousapproach,NAIRUisdeterminedbylevelof According totheexogenousapproach,labourmarketcharacteristics,suchas In additiontothediscrepanciesinde We canseefromthisequationthatU fl t uence thewageincreaseandwhich inrecentdecadesareoftencitedasthe –othervariableswhichcanin t-1 Nt-1 Nt –NAIRUintperiod, – NAIRUfromthepreviousperiod, – actualunemploymentratefromthepreviousperiod, vice versa t =0,wegetthefollowingequation: fi ts). π t =

π t e U . Ingeneralterms,itcanbe represented asfollows(Bozani, + fl

Nt ationratewillbeconstantwhentheactualunemployment β U =UNt

 Nt –U U –U - Nt t-1 Nt-1 -1 etc. + = α Nt affect theNAIRUandincreaserigidityof (U fl >U + α uence theNAIRU( fi nition oftheconceptNAIRU,inmodern (U t-1 δ – U z Nt-1 t-1 t + – U ifUt Nt-1 ε t

) +b Nt-1 -1 ). > U t , Nt-1 β

e.g. . Inotherwords,chang- <

0 unemployment fi ts reduc- fi ndsthe fl 2 ation fi ts, ONLINE FIRST where investigated thein Monitoring ofthehysteresiseffect isthesubject ofmanyworks.De-ChihLiu(2011) Literature 2. Review where period t,expectedtobeequaltherateofin ployment rateexhibitshysteresiseffect, theimpact ofthein rate inperiodt-1;U factors. If ex-ante structural changesintheeconomy;z rejected thehysteresishypothesis inunemployment. IPS, LLC,andBreitungpanel unitroottestsforindividualregionsintheUnitedStates, investigating thelabourmarket intheUnitedStates. This research,usingthe ADF Fisher, hysteresis hypothesisinOECD countries,andrejectsthesamehypothesiswhen majority ofstudies,which were usingtheconventionalunitroottests,supports the stabilization policysuccessfullydeterminetheunemployment rateatasustainablelevel. rates tendtorestorelong-runbalance. This suggeststhatlabourmarketinstitutions and in unemploymentcanberejectedforOECDcountriesoverall, becauseunemployment when testsareperformedonindividualcountries.However, thehysteresishypothesis results oftheresearchshowthathysteresiscanbecon performed byLiew, Chia,andPuah(2009),usingseveral panel unitroottests. The hysteresis hypothesiscanberejected. does nothaveapermanenteffect ontheopeningandclosingofjobpositions,that paradigm (exogenousapproachtodeterminingtheNAIRU), thatthestabilizationpolicy of theopeningandclosingjobpositionsinUSA accordingtothestructuralist the resultsofresearch,usingunitroottestsbasedonpanel,showthatprocess which intheshortrunhasapositiveimpactonopeningofnewjobpositions.However, management policy, wherethe positions intheUnitedStates. The paper emphasizes theimportanceofdemand sition. The paperstartswiththefollowingbasic researchhypotheses: as theeffect ofin the impactofactualunemploymentrateonNAIRU,orhysteresiseffect, aswell NAIRU rate). tary expansionincreasesin be observedthroughthechangesinrealrateofunemployment(forexample,mone- PRAGUE ECONOMIC PAPERS The researchperformed by Mohan,Kemegue, andSjuib(2008)showsthatthe Testing ofthehysteresishypothesisonexample14OECDcountrieswas H2: the H1: actualunemploymentrateaffects theNAIRU-there ishysteresiseffect Given thelarge numberoffactorsthatdetermine theNAIRU,thispaperwillexplore Δπ π t expected valueofzero,and istheactualrateofin t isthedifference betweentheratesofin π t e isswitchedontheleftsideofequation,weget: increase inthe fl ation rateontheNAIRUexampleofselectedcountriesintran- fl uence ofhysteresishypothesis ontheopeningandclosingofjob Nt - NAIRUinperiodt,whichmaybeconstantbutchangewith Δπ t = fl ation andreducesunemployment,whichispullingdownthe

β fl

 ation rateaffects thedecreaseinNAIRUand –U U fi scal andmonetarypoliciesstimulateaggregatedemand, fl ation inperiodt; - Nt t-1 ε t t -avariablethatre -avariablethatreferstothesupplyshockswith + δ z fl ation inperiodt-1;U t + fl ε ation inperiodtandt-1.Iftheunem- π t

t e -theexpectedrateofin fi rmed formostOECDcountries, fl ects thein fl ation rateontheNAIRUcan β

<

0 fl t–1 uence ofallother - unemployment vice versa fl ation for ation 3 . ONLINE FIRST two structuralbreaksinunitroottesting. the unemploymentrates,butoppositeistruewhenallowingforpresenceofupto that theapplicationofstandardGLS-classunitroottestscon natural ratehypothesisontheunemploymentratesofEUnewmembers. They found the hysteresishypothesis. signi Czech Republic,SlovakiaandtheBalticStatesextremely persistentinPoland. unemployment rateisleastpersistentinHungaryandSlovenia, morepersistentinthe persistent, implyingaslowrateofconvergence tothenaturalrateofunemployment. The ployment rateisnotstationaryinmostofthesamplecountries andthatshocksarehighly rate intheeightCEEcountrieswhichjoinedEU2004. They foundthattheunem- well describedasastationaryprocessaroundhighlypersistent structuralchanges. Poland andSlovenia,theSlovakRepublic)unemployment dynamicsappearstobe are morefrequentthanintheEU-15. is fasterintransitioncountries,butthetransitionsfromoneequilibriumstatetoanother 15 Europeancountries(EU-15),andcametotheconclusionthatmaintainingequilibrium of shocks. They comparedtheseresultswiththeofaggregatedataanalysisfor structural breaksontheformationofmultipleequilibriumstates,whichoccurasaresult panel data,aswellMarkovswitchingmodel. The analysisalsoincludedtheimpactof of CentralandEasternEurope,usingtheunitroottestsonindividualtimeseries and McAdam(2003)investigatedthepresenceofhysteresisin12transitioncountries an increasing number of an increasingnumber (2005) usingtheKalman increase intheNAIRU. their realinterestratesinthevulnerableperiodofarecessionexperiencedmuchsmaller effects oflabourmarketinstitutions. Those countrieswhichmoreaggressivelyreduced in 19OECDcountries. The resultssuggeststrongeffects ofmonetarypolicy, butweak hysteresis occursintheaftermathofrecessionsdependsonmonetarypolicyreactions show thatthehysteresisiscon of hysteresisinunemploymenttheUnitedStatesandEuropeanUnion. The results hysteresis effect, particularlyinGermany. León-Ledesma (2002)analysedthepresence can affect unemployment. fi States. PRAGUE ECONOMIC PAPERS lter, andcametotheconclusionthatthereishysteresiseffect andthatmonetarypolicies Cuestas andOrdonez(2011) showthatfor Camamero, Carrion-i-Silvestre,and Tamarit (2005)testforthehysteresis Gozgor (2013)testedthehysteresiseffect intenCEEcountries,andprovide Cuestas, Gil-Alana,andStaehr(2011) analyzedthedynamicsofunemployment The presenceofhysteresisintheeuroareawasexaminedbyLoageayand Tober Stockhammer andSturn(2008)investigatethehypothesisthatextenttowhich Although the Ball (2009)analysedunemploymentratesin20developedcountries,usingtheHP fi cant empiricalsupportforthe existenceofpersistenceinunemploymentrates,and hysteresis ef researches fi lter. The resultsofthisresearchcon fect is fi rmed inEuropeancountriesandrejectedtheUnited in theEuropean mostly analysed in developed economies, fi ve CEEcountries(Hungary, Latvia, transition countries. fi rmed thepresenceof fi rms thehysteresis in León-Ledesma versus thereis 4 the ONLINE FIRST have tobemaderegardingthenatureofmovementcomponentsU (U is therateofcyclicalunemployment. where with where U (2005), weassumethatitexhibits allows theNAIRUtovarybyanamount When thestandarddeviation where U are partsoftheNAIRU: nents: frictional,structural,andcyclicalunemployment,wherethe ous considerations,therateofunemploymentcanbeviewedassumthreecompo- second, wehavetotesttherelationbetweenNAIRUandin First, weneedtodeterminetheNAIRUfromactualunemploymentdataseries,and In ordertotestthehypothesisde Model 3. cyclical unemploymentU and ment andpotentialoutput.Ontheotherhand,demandshocks(aschangesinmonetary alter thepositionoflong-runaggregatesupplycurve,andchangelevelfullemploy- demand shocks.Supplyshocks(aschangesintechnology, demographicchanges, unemployment (aswellasinoutput)resultfromtwotypesofshocks,supplyshocksand in supply shockshavepermanent,long-lastingeffects, thedemandshockshavetemporary these twotypesofdisturbancesaremaderegardingthelastingtheireffects. While the ence thelongrunfull-employmentlevelofoutput. Thus, themaindistinctionsbetween U Apel andJansson,1999a,1999b;Claar, 2005): that theNAIRUfollowsarandomwalk(seeGordon,1997and1998;Laubach,2001; PRAGUE ECONOMIC PAPERS fl N uence onfull-employmentlevelofoutput. andU fi In ordertospecifytheempiricalmodelwhichwilldetectunobservedcomponents Regarding the Following theseminalworkofBlanchardandQuah(1989), Based ontheseconsiderations,widelyacceptedintheliterature,itcanbeassumed scalpolicy, changesinconsumption,bothforeignanddomestic, ε U ρ t isbetweenzeroandone, where isindependentlydistributederrortermwith t

is theobservedactualunemploymentrateintimet,U cyc ) fromtheeasilyaccessibleactualrateofunemployment,assumptions fl uctuation inothercomponentofactualrateunemployment,the cyc , following Apel andJansson (1999a,1999b),andClaar σ ε =0,thenU fi fi ned intheintroduction,twothingshavetobedone. rst-order serialcorrelation cyct ε ’ ε t N =U t t =

~ N(0, t ~ N(0, = U σ N ρ ε ineachperiod. isconstantovertime. When Nt U N +U cyct-1

ε t-1

σ σ ’ + t

ε isindependentlydistributed errorterm ε 2 cyc + ’ 2 (3). ) ε (5). )

ε t t ’ (1) (2), t fl ation rate.Followingprevi- : N istheNAIRU,andU fi rsttwocomponents etc. σ ε fl

≠ ) donotin utain in uctuations 0,themodel N andU 5 c etc. yc (4), fl u- . cyc )

ONLINE FIRST sample consistsof rate ofeightEuropeantransitionaleconomies,rangingfrom2000to2012. The countries’ time-invariant effect. U in Where U covers theperiodfrom2000to2012. Once themodelisspeci Kalman Filter Method 4. NAIRU andin ing sectionofthepaper. the NAIRU.Detailedspeci shocks, supplywhichaltertheNAIRU,anddemandshockscannot and theotherforcyclicalrateofunemployment,clearlydistinguishestwotypes Presented model,withtheuseoftwoindependentlydistributedshocks,oneforNAIRU (a memberoftheEUsince2013).DataaretakenfromEurostat. pean economies(BulgariaandRomania,membersoftheEUsince2007),Croatia lic, Slovakia,Slovenia,allmemberstatesoftheEUsince2004),andtwoEastEuro- U we employtheUCmethodinthispaper, speci paper. A panelhastheform X that thelastmentionedmethodhassomesigni (Structural Time-Series Models)orUC(UnobservedComponents)models,andconcluded Tetlow, methodsbasedonstructuralvectorautoregressivemodels,andthesocalledSTM the commonones:Hodrick-Prescott ment tousingstructuralmodelsoflabourmarket. Apel andJansson(1999a)surveyed well astheNAIRU),rangingfromsimple methods wereusedintheliteratureforestimatingnaturalrateofunemployment(as intuition behindthismethodisasfollows:speci series offorecasterrorsareused inamaximumlikelihoodroutineto 1999a). Bycomparingthese predictions totheactualvaluesofunemployment,aspeci a givensetofcoef model, inorderto Kalman- able (NAIRUinthiscase)toobservablevariable-actual unemployment. A recursive of parametersandthecorresponding estimatesofthenaturalrateemployment. PRAGUE ECONOMIC PAPERS fl ation rate), ation The seriesofdatausedinthisstudyisthequarterlyunemploymentrateand The secondpartofthemodelconsistsstatisticaltestrelationbetween A fi xed effect paneldataregressionmodelcanbewrittenas: fi N lter algorithmcanbeapplied tothesocalledstate-spacerepresentationof istheNAIRU,CPIconsumerpriceindexand i fl goesfrom1toN,whereNisthenumberofobservedcountries,and ation rate. We haveemployedthepaneldataregressionmodelinthis fi fi ve CentralEuropeaneconomies(Poland,Hungary, theCzechRepub- nd asequenceofoptimalpredictionsthe observable variablefor fi cients and sequenceoftheunobservableone(ApelJansson, fi ed, theappropriateresearchmethodshouldbeemployed. Various fi cation of theKalman it , whereXisavectorofobservedvariables(NAIRUand Nit fi = lter, theso-calledmultivariate α it = + fi tting thetrendintimeseriesofunemploy- μ β CPI i + fi fi cant advantagesoverothers. Therefore, fi ν ed modelrelatestheunobservablevari- cally theKalman it it fi +u lter model ispresentedinthefollow- (7), it (6), μ i isindividual-speci fi lter algorithm. The algorithm. lter fi fi lterofLaxtonand nd theoptimalset fl 6 ation fi fi c, c t

ONLINE FIRST More abouttheKalman a diffuse priorfor the distributionisassumed. The secondapproachisusedinthispaper. to be approaches tothisproblem.Inthe is assumedtoevolveasarandomwalk,likeinourmodel. There aretwotraditional necessary whenthetimeseriesarenon-stationary, asitis the casewhenNAIRU Quah (1989),aswellinmanyotherstudies. is adurationoftemporarilydisturbancestounemployment determinedinBlanchardand ( (2005) and Turner, for mated inthemaximumlikelihoodprocess,whilewehave usedavarietyofstartingvalues equation. Claar(2005)justi where Xtisthe2x1vectorofunobservedvariablesU to X a vectorofcontrolledvariables.MatrixesH, A, andBcontainparametersthatcorrespond where Zisavectorofobservedvariables,XunobservedandU the transitionequation,whichisacommonfeatureofmodelsinrelevantstudies. where A isamatrixwith1and space form,withameasurementequationandtransitionequation: the singleunemploymentrateseriesbyintroducingathirdsourceof the problemofdistillingnaturalrateunemployment(theNAIRUinthiscase)from Secondly, addinganadditionaltermtotheunemploymentrateequationwouldexacerbate reasonably welland,moreimportantly, itismeasuredinthesamemannereveryperiod. that, inthismodel,containsonesforitselements. This isthe U as follows. The equation(1)maybeequivalently expressedas: unemployment rate”. The modelalsodoesnotcontain matrixofcontrolledvariablesU X Equations (2)-(5)canbewrittenas relates theunobservedvariablestoobservablevariableUt. PRAGUE ECONOMIC PAPERS ρ , ρ σ t thatareconsistentwithabusinesscyclehalf-liferanging from 6to48months,which , X Another issueistoestimatetheinitialvaluesofunobserved variables,whichis Before runningtheKalman Z In ordertoapplytheKalman Following Claar(2005),ourmodeldoesnotcontainerrorterm Our model,developedintheprevioussection,canbewrittenstatespaceform X ε 2 fi xed, whileinthesecondapproach, theinitialvalueispresumedtoberandom,and ,

σ t-1 ε ’ , andU 2 t ) shouldbeestimated. The valuesofthevarianceerrortermsareesti- t =HX = A X t , respectively. Terms t + t-1 et al. +BU η t (measurement equation) fi (2001). lter proceduresandestimation techniquescanbefoundinClaar t + fi es thisbythefactthat“theunemploymentrateismeasured ω t ρ (transition equation) onthemaindiagonal,and fi lter, theunknownparametersinstatespacemodel fi fi transition equations rst one,theinitialvalueofNAIRUisconsidered lter procedure,thesystemmustbewritteninastate t =HX t η = A X t and t ,.,T (8) , t=1,..., T

ω t-1 t areindependentlydistributederrorterms. + ω t (9) , asfollows: N andU ω t measurement equation = ( cyc ε . H t, ε η ’

t is a t in themeasurement ). fl uctuation inthe fi xed 1x2vector 7 that t in ONLINE FIRST Source: own calculation own Source: Table 1 Table the Appendix. Inthe decomposed intotheNAIRUandcyclicalcomponent. The obtainedNAIRUisshownin Using theKalman Results 5. NAIRU inthe (8.48). Incontrasttothisgroupofcountries,thereisacountrieswithhigh NAIRU (5.14),followedbySlovenia(6.47),Romania(7.01),andtheCzechRepublic EU, therewasasigni Slovakia (20.06). As aresultofthesuccessfultransitionreformandaccessionto Higher NAIRUinthelastcomparedto had theNAIRUover10%are:Croatia(13.10),Slovakia(12.56),andHungary(11.55). Slovenia (8.10),andBulgaria(9.69). The threecountrieswhichattheendofperiod Republic hadthelowestNAIRU(6.53),followedbyRomania(6.97),Poland(7.72), for Hungary)bytheendofperiod(2012Q4).Inlastquarter2012,Czech is notstatisticallysigni is apositivetrend, Poland, Romania,Slovakia,andtheCzechRepublic),whileincaseofHungarythere signi results oftestingtheexistencetrendarepresentedin Table 1. There isstatistically signi time, theexistenceofhysteresiscanbetestedbyexaminingstatistically NAIRU intheobservedperiod. was observedonlyinthecaseofHungary, whileallothercountrieshadadeclineinthe show atendencytowardsstatisticalsigni PRAGUE ECONOMIC PAPERS Czech Republic Croatia Slovakia Slovenia Romania Poland Hungary Bulgaria Bearing inmindthatthehysteresiseffect involves achangeintheNAIRUover fi fi cant trendinsixcountries,ofwhich cant deterministicorstochastictrendintheobtainedseriesofNAIRU. The

| Analysis of the NAIRU trend trend NAIRU the of |Analysis fi rst observedquarter, consistingofBulgaria(18.46),Poland(19.78),and Trend coeffi Trend i.e fi lter, theactualunemploymentratesinobservedcountriesare fi rst quarterof2000( 001**0.8964 0.2010 0.9391 0.4779 -0.0416*** -0.0287 0.8837 -0.1577*** 0.9938 0.0267 0.9816 -0.0012** 0.8229 -0.2579*** 0.1287*** -0.1838*** . thegrowthinNAIRUduringperiod(2000–2012). The trend fi fi cant decreaseintheNAIRUall surveyedcountries(except cant inthecaseofSloveniaandCroatia;theirNAIRUdoesnot in R-squared cient fi cance overthetime. fi rst observedquarter),Hungaryhadthelowest fi rst quarter(2012Q4incontrastto2000Q1) fi ve casesthereisanegativeone(Bulgaria, 8 ONLINE FIRST Table 2 Table Bnwdh NwyWs uoai)uigBrlt enl *-0.1 -0.01 **-0.05 *** note: kernel Bartlett using automatic) 5(Newey-West *Bandwidth: calculation own Source: is de periods (lowvalueoftheDurbin-Watson statistic),the i.e. the regressionmodelon using theDifference-Stationary Process(DSP),toeliminatethestochastictrend.Since the Trend StationaryProcess(TSP),inordertoeliminatethedeterministictrend,and of panelregressionswith rate affects thedeclineinNAIRUand studies thathavecon phenomenon inthecaseofOECDcountriesindividually. Itisalsoconsistentwiththe studies carriedoutbyLiew, ChiaandPuah(2009)whichcon hysteresis effect onasampleofobservedtransitioncountries. NAIRU timeseriesarestationary, series arestationary. Inalleightcases,onecanrejectthehypothesisonwhether results ofKwiatowski-Phillips-Schmidt-Shin(KPSS)testwhethertheNAIRUtime that theNAIRUhasarandomwalk, the NAIRUtimeseriesarestationary. As statedinthesectionmodel,assumptionis by Loageayand Tober (2005),thenBall(2009),andLeón-Ledesma(2002). previously estimatedNAIRU, whilethe in Table3. an independentvariableofthe regressionequation.Panelresultsarepresented PRAGUE ECONOMIC PAPERS Czech Republic Croatia Slovakia Slovenia Romania Poland Hungary Bulgaria statisticalerrorswerepositivelycorrelatedwith errorsfromprevious fi The resultoftestingthehysteresiseffect existence isconsistentwithprevious The existenceofahysteresiseffect canalternativelybeprovedbytestingwhether Testing otherresearchhypothesis-thethatanincreasein ned (

| The Results of the KPSS Test on whether the NAIRU Is Stationary Is NAIRU the Test whether on KPSS the of Results |The fi rst order AR - AR (1)). The dependentvariablewas the fi rmed thepresenceof hysteresisindevelopedcountries,carriedout fi xed effects. Stationarityofthetimeseriesisprovidedusing fi rst differences showedtheexistenceofautocorrelation, KPSS test statistics* i.e. i.e. 0.2462*** 0.2225*** 0.2461*** 0.2503*** 0.1528** 0.1302* 0.2519*** 0.2522*** conductedKPSStestcon fi itisnon-stationaryseries. Table 2presentsthe rst difference ofconsumerpriceindex (CPI)is vice versa wasperformedusingthemethod fi rst-orderauto-regressionmodel fi rmed theexistenceofthis fi rms theexistenceof fi rst difference of the fl 9 ation ONLINE FIRST period between2000and2012. The trendisnotstatisticallysigni Romania, Slovakia,andtheCzechRepublic),increase inthecaseofHungary fi series ofNAIRUwhenhysteresiswascon hysteresis effect. A similar resultwasobtainedbytestingtheexistenceofatrendin its seriesarestationarydemonstratethatinthecaseof all theeightcountriesthereis effect andthein level unemploymentseeksinthelongrun. The paperteststheexistenceofhysteresis ences thatunemploymentdynamicsisanon-stationaryprocess, evolved concerninghysteresistheoryandtheconceptofNAIRU.Hysteresisin Because ofthegreatimportance,anumbertheoreticalandempiricalliteratureshave 6. Conclusion tries intransition. Table 3 Table Source: own calculation own Source: Slovenia andCroatia;theirNAIRUdoesnotshowatendency towardsstatisticalsigni cally signi the panelregressionanalysis,andresultscon cance overtime. by testingonlytheimpactof in of unemploymentandin that thepolicyofdemandmanagement, a numberoffactorsconcerning bothdemandandsupply. leads tothedecreaseinNAIRU. manifests effects ontheNAIRUmovementina waythattheincreasein signi PRAGUE ECONOMIC PAPERS ve casestherewasdecreaseintheNAIRUovertime(incaseofBulgaria,Poland, Prob (F-statistic) Prob F-statistic R-squared Adjusted Coeffi R-squared D(CPI) C Variable The resultingregressionequationcon The NAIRUisdeterminedusingtheKalman Analysis oftheimpactin fi cant effect ontheNAIRUingroupofobservedcountries,

| Panel Regression Results of the NAIRU Dependency on CPI on Dependency NAIRU the of Results Regression |Panel fi cant effect ofchangeintheconsumerprice indexontheNAIRU. This means fl uenceofin Total panel observations: 10x52=512 observations: Total panel 0031 .270-.2780.0036 -2.926778 0.021700 -0.003512 .000D tt 1.676803 DW stat. 0.000000 0.765385 0.733581 24.06612 01380117 74580.0000 77.40558 0.131172 10.15348 fl ation. Limitationofthemodel isthattheresultswereobtained in t.ErrtSaitcProb. t-Statistic Std. Error cient fl ationtrendsontheNAIRUexampleofeightcoun- fl fl ation ontheNAIRU,withouttaking intoconsideration ationary tendenciesontheNAIRU wasconductedusing i.e. fi rmed inthecaseofsixcountrieswhich monetarypolicy, canaffect themovement fi rms thatin fi rm theexistenceofasmallbutstatisti- fi lter, andtheresultsoftestingwhether fl ation ratehasastatistically i.e. fi i.e. cant inthecaseof thereisnounique monetarypolicy fl ation rate 10 fl u- fi - ONLINE FIRST Apel, M.,Jansson,P. References Apel, M.,Jansson,P. Blanchard, O., Summers, L Blanchard, O., Quah,D. Ball, L. Bozani, V., N. Drydakis, Camarero, M.,Carrion-Silvestre, J. L., Tamarit, C. Liew, V. Chia,R.C.,Puah, K., C.H. León-Ledesma, M.,McAdam, P. León-Ledesma, M. Laubach, T. Gozgor, G. Gordon, R.J. Gordon, R.J. L. De-Chih, Cuestas, J. C.,Ordonez, J. Cuestas, J. C.,Gil-Alana, L.A.andStaehr, K. Claar, V. PRAGUE ECONOMIC PAPERS Economics Disturbances.” No. 14818. org/10.1016/S0165-1765(99)00111-1 Output andtheNAIRU.” NBER Macroeconomics Annual, No. 1. for the Study of Labor Discussion Paperfor theStudyofLaborDiscussion Countries.” Central Bank, Central Bank, Working Paper No. 234. Approach.” org/10.1162/00346530151143761 Review ofEconomic andStatistics Time-Varying NAIRU.” jep.11.1.11 Journal ofEconomic Perspectives the U.S.” in Central andEastern European Countries.” pp. 1–24. Proceedings ofEconomics: ofRijeka Journal ofEconomics School andBusiness Facultat i Empresa, d’Economia Universitat deBarcelona. NAIRU Estimates for CEECs:A Univariate Approach.” Working Papers inEconomics, Papers No. 9915. Countries? Evidence from Parametric andNon-P Economics of Unemployment Persistence inEuropean Transition Economies.” (2009), “Hysteresis andUnemployment: OldandNewEvidence.” NBER Working Paper (2005), “A Kalman Filter Approach to ofUnemployment.” EstimatingtheNaturalRate (2013), “Testing Unemployment Persistence inCentral andEastern European (2011), “Hysteresis Evidence inJobCreation Hypothesis from andDestruction: (2001), theNAIRU:Evidence“Measuring from Seven Economies.” (1998), “Foundations SupplyShocksandthe oftheGoldilocksEconomy: (1997), for Implications Economic“The Policy.”Time-Varying NAIRUandIts Annals ofEconomicsAnnals andFinance , , Vol. 39,No. 4,pp. 514–532,http://dx.doi.org/10.1016/j.jce.2011.09.002 InternationalJournalofEconomics &Financial Issues

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Empirical 23, No. 1, 11 ONLINE FIRST NAIRU for selected economies economies selected for NAIRU Appendix Loageay, C., Tober, S. Mohan, R.,Kemegue, F., Sjuib, F. Snowdon, B., Vane, H.R. Sørensen, P. B., Whitta-Jacobsen, H.J. Stockhammer, E., Sturn,S. Turner, D., Boone, L.,Giorno, C.,Meacci, M.,Rae, D., P. Richardson, PRAGUE ECONOMIC PAPERS 0041.26 .5711.93 .1826343 94988.28692 19.42988 6.394839 7.015872 19.29539 5.351781 17.42566 2000Q4 0441.616759 58997025 .2581.97 245 7.264238 12.4259 15.89176 6.021578 7.002958 15.84969 6.735699 11.8641 2004Q4 0021.21 .1181.15 .18 .5061.56 8.420142 19.85564 6.451056 7.01588 19.61956 5.211158 18.12117 2000Q2 0421.03 .25 64377067 .5041.47 27597.390122 12.71599 16.34374 6.053074 7.006873 16.41357 6.52052 12.50339 2004Q2 0031.77 .8371.58 .1816429 96288.353474 19.64288 6.422899 7.015881 19.45788 5.281327 17.77375 2000Q3 0431.78 .2251.35 .0076069 61771.62 7.327195 12.56921 16.11737 6.036291 7.005017 16.13655 6.626295 12.17884 2004Q3 0341.70 .1761.30 .09 .9741.94 30757.515618 13.01745 16.79649 6.091714 7.00995 16.93605 6.319796 13.17704 2003Q4 0011.63 .40 97057057 .7252.62 8.486852 20.06829 6.479235 7.015875 19.78095 5.14109 18.46833 2000Q1 0411.35 .13 66087081 .7681.72 28597.452934 12.86559 16.57027 6.071638 7.008516 16.68018 6.41837 12.83653 2004Q1 0241.86 .5881.55 .1866123 76321.38 7.766662 13.63788 17.69352 6.182837 7.013896 17.85259 5.958828 14.58768 2002Q4 0521.676957 52976981 .9561.49 21297.138875 12.15289 15.44596 5.999576 6.998314 15.24957 6.965278 11.2687 2005Q2 0321.72 .3961.12 .12 .3451.49 335 7.640846 13.3258 17.24695 6.135465 7.01225 17.41528 6.132966 13.87521 2003Q2 0331.26 .2761.80 .1196136 70221.7 7.578223 13.171 17.02212 6.113061 7.011189 17.18106 6.224706 13.52369 2003Q3 0221.06 .9781.59 .1996229 81521.54 7.893999 13.95149 18.13502 6.232994 7.014969 18.25195 5.795738 15.30465 2002Q2 0231.41 .7081.56 .1516270 79451.96 7.830096 13.79461 17.91495 6.207605 7.014501 18.05666 5.876018 14.94615 2002Q3 0511.63 .4791.57 .0746093 56771.88 7.201395 12.28685 15.66767 6.009234 7.000714 15.55373 6.848709 11.56033 2005Q1 0311.32 .4451.39 .1196186 74011.85 7.703615 13.48152 17.47081 6.158764 7.013149 17.63899 6.044405 14.23029 2003Q1 0141.16 .4791.18 .15562541.71 8.023325 18.57112 6.28534 7.015545 18.61989 5.641729 16.01862 2001Q4 0211.63 .1741.33 .1316283 83341.04 7.958411 14.10842 18.35374 6.258931 7.015311 18.43936 5.717734 15.66235 2002Q1 0121.275444 894670596399 902 8.154459 19.0023 6.339397 7.01579 18.96476 5.494546 16.7257 2001Q2 0131.71 .6441.96 .16763271.82 8.088695 18.78725 6.31217 7.015697 18.79465 5.567434 16.37312 2001Q3 0111.74 .2711.33 .1846367 92638.220556 19.21643 6.366976 7.015844 19.13132 5.422761 17.07644 2001Q1 Institute, Working Paper No. 4/2005. Using State Level Data.” State and BusinessCycles No. 33,2001/II. ofUnemployment Rate forthe Structural theOECDCountries.” Hysteresis.” . Edward ElgarPublishing. ugraHnayPln oai lvnaSoai Croatia Slovakia Slovenia Romania Poland Hungary Bulgaria IMK Working Paper (2005),Hysteresis andNAIRUintheEuro Area, Macroeconomic Policy . 2th Edition, McGraw-Hill Education. . 2thEdition,McGraw-Hill (2005), (2008), “The Impact of Monetary Policy (2008), onUnemployment ofMonetary Impact “The Journal ofBusiness&Economics Research Modern Macroeconomics: Origins, andCurrent Development Its (2008), “Hysteresis Unemployment: Panel In UnitRoots Tests , 15–2008. (2010), Introducing Advanced Macroeconomics: Growth OECD Economic Studies , Vol. 6,No. 2,pp. 53–60. (2001), “Estimating Republic Czech 12 ,

ONLINE FIRST (Eurostat database) fi Kalman on based calculation Authors’ Source: PRAGUE ECONOMIC PAPERS 0649802 .3361.226924 .1771.25 15896.789294 11.50859 14.22452 6.019737 6.982649 13.3282 7.737336 9.830421 2006Q4 0948931 .0121.13 .6836738 28511.77 6.478394 11.57471 12.88591 6.723386 6.967853 10.01039 9.606162 8.913918 2009Q4 0848904 .4731.61 .6726373 31961.27 6.512365 11.32478 13.14956 6.377834 6.968752 10.96318 8.949773 8.930041 2008Q4 0621.45 .6251.72 .8895957 463 16626.898194 11.68642 14.6035 5.995172 6.987869 13.97628 7.466245 10.24452 2006Q2 0631.26 .0081.57 .8296040 44961.90 6.84239 11.59207 14.40956 6.004804 6.985229 13.65172 7.600078 10.02865 2006Q3 0928816 .7421.63 .68565821.98 14366.488638 11.42346 12.99887 6.53842 6.967875 10.46736 9.276412 8.891263 2009Q2 0938851 .4131.33 .6746682 29861.99 6.4821 11.49294 12.93826 6.628127 6.967774 10.23433 9.441123 8.895617 2009Q3 0829096 .2951.086909 .4181.46 123 6.553452 11.2837 13.34568 6.245168 6.970699 11.5008 8.629965 9.039561 2008Q2 0838951 .8791.27 .6546376 32111.98 6.530557 11.29685 13.24161 6.307867 6.969584 11.22674 8.788799 8.975519 2008Q3 0541.21 .0861.23 .9155993 50381.08 7.015929 11.90384 15.01368 5.989739 6.993185 14.62132 7.208876 10.72619 2005Q4 0611.737354 43076903 .9391.02 17076.956202 11.79067 14.80525 5.990319 6.990533 14.30007 7.335844 10.4773 2006Q1 0531.93 .8371.33 .9715925 52721.29 7.076945 12.02491 15.22762 5.992958 6.995791 14.93832 7.085347 10.99031 2005Q3 0918921 .1491.11 .6116441 30841.61 6.498547 11.36717 13.06894 6.454819 6.968191 10.71014 9.112469 8.902312 2009Q1 0819123 .76 17566929 .88 34281.84 6.581224 11.28544 13.46208 6.18985 6.972097 11.78506 8.47362 9.122734 2008Q1 0749258 .2091.78 .7796119 35081.09 6.613894 11.30195 13.59088 6.141895 6.973769 12.07889 8.320049 9.225382 2007Q4 0729492 .2041.93 .7896078 38451.71 6.693294 11.37817 13.88495 6.067488 6.977839 12.69139 8.022084 9.489423 2007Q2 0739373 .6441.83 .7626118 37151.39 6.651333 11.33297 13.73195 6.101184 6.975692 12.38139 8.169474 9.347638 2007Q3 0049041 02399185 .63 .4271.34 20256.483254 12.00225 12.73649 7.148267 6.96936 9.188659 10.26349 9.094714 2010Q4 0719609 .7021.05 .8116007 40961.39 6.739427 11.43698 14.04936 6.040477 6.980171 13.00752 7.878012 9.650491 2007Q1 0028960 .3879569 .6436984 28151.78 6.47761 11.77083 12.80125 6.928249 6.968423 9.586494 9.935827 8.986009 2010Q2 0039066 00979346 .6877065 27631.87 6.479776 11.88274 12.76683 7.036652 6.968857 9.384763 10.09997 9.036561 2010Q3 0249615 15457754 .7038108 25611.02 6.535535 13.10221 12.56681 8.100488 6.974013 7.725744 11.55435 9.691156 2012Q4 0018949 .71 .97 .60 .2661.46 16736.477038 11.66773 12.84061 6.823626 6.96808 9.79474 9.77116 8.944593 2010Q1 0229525 12358033 .7867877 26391.10 6.520459 12.81601 12.60379 7.857778 6.972856 8.083437 11.23325 9.532759 2012Q2 0239616 13327949 .74679971.82 29876.527967 12.95897 12.58524 7.97907 6.973436 7.904497 11.39382 9.611867 2012Q3 021944 10268220 .7217763 262 26346.513107 12.67384 12.6227 7.736833 6.972271 8.262907 11.07256 9.4542 2012Q1 0149364 09138438 .76 .1561.431.316.506026 12.5331 12.6423 7.616506 6.97168 8.443386 10.91163 9.376743 2011Q4 0129280 05848894 .74 .7921.81 22916.493232 12.25931 12.68518 7.378972 6.97049 8.809847 10.58864 9.228209 2011Q2 0139311 07068656 .7047479 26271.96 6.499354 12.39462 12.66297 7.497096 6.971084 8.625466 10.75036 9.301118 2011Q3 0119192 04678970 .69 .6541.051.21 6.487807 12.12816 12.7095 7.262544 6.96991 8.997304 10.42637 9.159026 2011Q1 lter method applied on actual unemployment rates 13