Interconnection between labor market and monetary policy: NAIRU, unemployment hysteresis and monetary policy responses

This dissertation thesis deals with relation between labour market and monetary policy referring to two fundamental theoretical concepts -- natural rate hypothesis (or NAIRU) and unemployment hysteresis hypothesis. The first chapter outlines the most frequent values of the Phillips curve, the fundamental model of macroeconomics theory in the relation between the labour market and the monetary policy. The following chapter deals with the exogenous NAIRU concept which works as natural unemployment rate approximation. The unemployment hysteresis deals with the NAIRU as endogenous variable which is dependent on preceding imbalanced situations on labour market. The thesis outlines the main causes of the hysteresis: capital scrapping effect, role of the long-term unemployment and the insider-outsider hypothesis. The third chapter also comprises simple econometric tests of both particular mechanisms and the hysteresis itself based on usual unit roots tests. The results show the hysteresis using data from both the Czech Republic and Central and Eastern Europe countries (CEEC). The fourth chapter deals with monetary-political implications of the unemployment hysteresis. The practical part of the thesis is based on two hypotheses of the relation between inflation (policy interest rate) and NAIRU. The last chapter based on the VAR model outlines short-term relations between the labour market and monetary policy variables. Long-term relations are tested by both the co-integration analysis and vector error correction model (VECM). These models are examined on the data from the Czech Republic and Poland (2000-2013). The thesis also applies pooled regression estimate for ten CEEC. The results show that the monetary policy does have impact on the labour market not only in the short-term but also in the long-term period and thus they confirm the hysteresis hypothesi