A1505
Title: Testing the hysteresis hypothesis of unemployment in Japan: A cyclical time trend approach
Authors: Yumeri Ninomiya - Kobe University (Japan) [presenting]
Kaiji Motegi - Kobe University (Japan)
Abstract: The hysteresis hypothesis of unemployment is known as a potential factor for secular stagnation. Whether the unemployment hysteresis is present or absent in reality can be transformed to a testable question whether the unemployment rate follows a non-stationary or stationary process. The unit root hypothesis of unemployment rates is tested with a cyclical trend regression model, where the cyclical time trend is specified by trigonometric functions. The irrelevance hypothesis of the cyclical trend is pre-tested by a data-driven approach which does not require a prior knowledge of the non-stationarity versus stationarity of the unemployment rate. When the cyclical trend is deemed necessary, the unit root hypothesis of the unemployment rate is tested via the Lagrange Multiplier test associated with the cyclical trend model. The proposed methodology is applied to quarterly unemployment data of Japan, finding that cyclical trends are necessary for the whole country and multiple regions. Further, the presence of unemployment hysteresis is observed for most regions. These empirical results suggest that Japan's secular stagnation, which is sometimes called the lost three decades, could be attributed to the unemployment hysteresis.
