Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/333943 
Year of Publication: 
2025
Series/Report no.: 
ZÖSS Discussion Paper No. 124
Publisher: 
Universität Hamburg, Zentrum für Ökonomische und Soziologische Studien (ZÖSS), Hamburg
Abstract: 
This paper develops a Keynesian stochastic framework to reassess the natural rate hypothesis in the context of the Sri Lankan economy. By embedding fractional Brownian motion to capture persistent inflationary shocks and incorporating nonlinear interactions between unemployment dynamics and aggregate demand, the model contrasts expansionary Keynesian policies with the monetarist view of structural unemployment. Empirically, the estimated income series indicates that targeted income interventions can systematically reduce unemployment over time, illustrating the capacity of demand-side policies to stabilize labor markets. The results suggest that fiscal and monetary measures, when sustained and coordinated, not only mitigate hysteresis effects but can also shift unemployment away from the so-called natural level, reaffirming the Keynesian insight that active policy can shape real economic outcomes even in the presence of structural frictions. This study contributes both theoretically to macroeconomic stabilization debates and practically to policy design in economies facing recurrent shocks and structural vulnerabilities.
Subjects: 
Keynesian macroeconomics
natural rate hypothesis
unemployment dynamics
income stabilization
Sri Lanka
JEL: 
E24
E32
E62
O53
Document Type: 
Working Paper

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