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This paper analyses the effects of deregulation of employment in an environment of low interest rates and economic uncertainty. For this purpose, we estimate a switching employment equation based on the play model of hysteresis. As a novel feature, the estimation allows for a possible change in the value of the switching parameter after the implementation of labour market reforms. We use Portuguese monthly industrial data spanning from January 2000 to October 2016. Portugal provides a good case study since it is a country where significant measures towards the deregulation of the labour market were applied after the recent financial crisis. The results show that these measures reduced the hysteresis effects in the dynamics of aggregate employment except in the period where uncertainty increased substantially, when the opposite happened.

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The idea that the Euro zone sovereign debt crisis was caused by structural weaknesses degenerating into fundamental macroeconomic imbalances in the peripheral countries prevails among international institutions such as the IMF, the ECB, and the European Commission. On the contrary, some economists believe that this crisis is the consequence of major deficiencies in the architecture of economic policy making in the Euro zone that did not allow a proper response to a global systemic crisis of the financial markets that started in the United States. The objective of this paper is to provide a better understanding of the public debt dynamics in the EU, differentiating the case of Euro zone peripheral countries. We used quarterly data from 2000 to 2011 to estimate a small-scale model that takes into account the interactions between key variables. Our results do not support entirely the official view. We conclude that the cause of the adverse debt dynamics unravelling after 2007 was a sharp GDP contraction, coupled with a substantial increase in the interest cost of debt finance due to higher self-fulfilling solvency risks perceived by creditors, interacting with a higher sensitiveness of Euro zone peripheral countries to fundamentals.

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