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Unemployment, Investment and Global Expected Returns: A Panel FAVAR Approach

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Author Info

  • Ron Smith

    (Department of Economics, Mathematics & Statistics, Birkbeck)

  • Gylfi Zoega

    (Department of Economics, Mathematics & Statistics, Birkbeck)

Abstract

We consider the hypothesis that a common factor, global expected returns, drives unemployment and investment in 21 OECD countries over the period 1960-2002. We investigate this hypothesis using a panel-factor augmented-vector autoregression (FAVAR). We first estimate the common factors of unemployment and investment by principal components and show that the first principal component of unemployment is almost identical to that of investment and that they both show the pattern one would expect of a rate of return as indicated by long interest rates. We then estimate panel FAVARs to measure the dynamic impact of the global factors. Investment appears to drive unemployment and – allowing for a moving natural rate of unemployment driven by the global factor – produces much faster adjustment by unemployment.

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File URL: http://www.bbk.ac.uk/ems/research/wp/PDF/BWPEF0524.pdf
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Bibliographic Info

Paper provided by Birkbeck, Department of Economics, Mathematics & Statistics in its series Birkbeck Working Papers in Economics and Finance with number 0524.

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Date of creation: Nov 2005
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Handle: RePEc:bbk:bbkefp:0524

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Keywords: Investment; unemployment; principal components.;

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  1. M. Hashem Pesaran, 2006. "Estimation and Inference in Large Heterogeneous Panels with a Multifactor Error Structure," Econometrica, Econometric Society, vol. 74(4), pages 967-1012, 07.
  2. Canova, Fabio & Ciccarelli, Matteo & Ortega, Eva, 2004. "Similarities and convergence in G-7 cycles," Working Paper Series 0312, European Central Bank.
  3. Ben S. Bernanke & Jean Boivin & Piotr Eliasz, 2004. "Measuring the Effects of Monetary Policy: A Factor-Augmented Vector Autoregressive (FAVAR) Approach," NBER Working Papers 10220, National Bureau of Economic Research, Inc.
  4. Gianluca Lagana & Andrew Mountford, 2005. "Measuring Monetary Policy In The Uk: A Factor-Augmented Vector Autoregression Model Approach," Manchester School, University of Manchester, vol. 73(s1), pages 77-98, 09.
  5. Gomes, Joao F & Greenwood, Jeremy & Rebelo, Sérgio, 1997. "Equilibrium Unemployment," CEPR Discussion Papers 1602, C.E.P.R. Discussion Papers.
  6. Jim Malley & Thomas Moutos, . "Capital Accumulation and Unemployment: A Tale of Two 'Continents'," Working Papers 9820, Business School - Economics, University of Glasgow.
  7. Walter Y. Oi, 1962. "Labor as a Quasi-Fixed Factor," Journal of Political Economy, University of Chicago Press, vol. 70, pages 538.
  8. Herbertsson, Tryggvi Thor & Zoega, Gylfi, 2002. "The Modigliani 'puzzle'," Economics Letters, Elsevier, vol. 76(3), pages 437-442, August.
  9. Stephen Nickell, 2003. "A Picture of European Unemployment: Success and Failure," CEP Discussion Papers dp0577, Centre for Economic Performance, LSE.
  10. Layard, Richard & Nickell, Stephen & Jackman, Richard, 2005. "Unemployment: Macroeconomic Performance and the Labour Market," OUP Catalogue, Oxford University Press, number 9780199279173, September.
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Cited by:
  1. Roberto Bande Ramudo & Manuel Fernández Grela & Mª Dolores Riveiro García, 2011. "Consumption, Saving, Investment, and Unemployment. SVAR Tests of the Effects of Changes in the Consumption-Saving Pattern," Documentos de trabajo - Analise Economica 0045, IDEGA - Instituto Universitario de Estudios e Desenvolvemento de Galicia.
  2. Roberto Bande & Marika Karanassou, 2010. "Spanish Regional Unemployment Revisited: The Role of Capital Accumulation," Working Papers 666, Queen Mary, University of London, School of Economics and Finance.

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