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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)

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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.ems.bbk.ac.uk/research/wp/PDF/BWPEF0524.pdf
File Format: application/pdf
File Function: First version, 2005
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Publisher 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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Related research
Keywords: Investment; unemployment; principal components.;

Find related papers by JEL classification:
J1 - Labor and Demographic Economics - - Demographic Economics
E2 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment

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References listed on IDEAS
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  1. Fabio Canova & Matteo Ciccarelli & Eva Ortega, 2004. "Similarities and convergence in G-7 cycles," Working Paper Series 312, European Central Bank. [Downloadable!]
    Other versions:
  2. Stephen Nickell, 2003. "A Picture of European Unemployment: Success and Failure," CEP Discussion Papers dp0577, Centre for Economic Performance, LSE. [Downloadable!]
  3. Gomes, Joao & Greenwood, Jeremy & Rebelo, Sergio, 2001. "Equilibrium unemployment," Journal of Monetary Economics, Elsevier, vol. 48(1), pages 109-152, August. [Downloadable!] (restricted)
    Other versions:
  4. M. Hashem Pesaran, 2004. "Estimation and Inference in Large Heterogeneous Panels with a Multifactor Error Structure," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
    Other versions:
  5. 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. [Downloadable!] (restricted)
    Other versions:
  6. Malley, Jim & Moutos, Thomas, 2001. " Capital Accumulation and Unemployment: A Tale of Two "Continents."," Scandinavian Journal of Economics, Blackwell Publishing, vol. 103(1), pages 79-99, March. [Downloadable!] (restricted)
    Other versions:
  7. Herbertsson, Tryggvi Thor & Zoega, Gylfi, 2002. "The Modigliani 'puzzle'," Economics Letters, Elsevier, vol. 76(3), pages 437-442, August. [Downloadable!] (restricted)
  8. 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. [Downloadable!] (restricted)
  9. Walter Y. Oi, 1962. "Labor as a Quasi-Fixed Factor," Journal of Political Economy, University of Chicago Press, vol. 70, pages 538. [Downloadable!] (restricted)
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