Unemployment has risen sharply in a number of countries and it appears to be becoming more persistent. The experience of the 1970s and 1980s showed that adverse unemployment shocks could have long-lasting effects with very serious economic and social consequences. A key mechanism producing these...

This paper explores the properties of an open economy model in which real exchange rate overshooting has a permanent impact on the rate of unemployment via a hysteresis mechanism. The magnitude of this effect depends on the slope of the short-run Phillips curve, the speed with which expectations...