A Note on Southeast Asian Hysteretic Unemployment

The present paper attempts to examine if unemployment rates in Southeast Asia demonstrate hysteresis, and to find out the propagation mechanism at work. By using the standard Augmented Dickey-Fuller (ADF) test, Schmidt and Phillips, and Lee and Strazicich LM unit root test respectively without and with structural breaks, we found that our sampled countries exhibit no hysteresis in unemployment rates, except for Singapore. With a dynamic optimizing model we inferred that hysteresis in unemployment can be induced by monetary policy. Given the weight on actual inflation stabilization, countries that implement policy feedback rule that assigns greater weight on output gap stabilization, in effect, respond to both actual and expected inflation rates. Such a policy stance that over emphasizes both actual and expected inflationary threats will lead to inflation persistence, which in turn, causes unemployment persistence as the real wage is unable to adjust to equilibrate the labor market. How policy is conducted, be it cold-turkey or gradualism approach, is also responsible for the existence of hysteretic unemployment