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Are Interest Rates Responsible for Unemployment in the Eighties ? A Bayesian Analysis of Cointegrated Relationship with a Regime Shift

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  • de la Croix, David

    (UNIVERSITE CATHOLIQUE DE LOUVAIN, Institut de Recherches Economiques et Sociales (IRES) ; Belgian National Fund for Scientific Research (FNRS))

  • Lubrano, Michel

    (GREQE-CNRS, Marseille)

Abstract

To what extent can the persistence of very high unemployment rates in most of the European countries be attributed to the presence of high real interest rates ? This question, essentially addressed by the ‘customer market’ price)setting school, was very much debated in Europe these last years. It is empirically analysed for four European economies (Belgium, Denmark, France, Germany) and the USA in our paper. We use a bivariate cointegrating Var model with one endogenous breaking point between unemployment and real interest rate. Within this model and devising a new Bayesian approach, the weak and strong exogeneity of the interest rate is tested. For the four European countries the model is shown to be cointegrating providing a break point is allowed . The four posterior densities of the breaking point are very similar, when the classical estimates give more divergent and counter-intuitive information. For the four countries, the real interest rate is weakly exogenous, providing support to the hypothesis of long run causation of interest rates on unemployment after 1974. Short term causation is verified for only three countries.

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Bibliographic Info

Paper provided by Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES) in its series Discussion Papers (IRES - Institut de Recherches Economiques et Sociales) with number 1994015.

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Length: 28
Date of creation: 01 Jun 1994
Date of revision:
Handle: RePEc:ctl:louvir:1994015

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Cited by:
  1. Croix,David,de la & Palm,Franz & Urbain,Jean-Pierre, 1996. "Labor market dynamics when effort depends on wage growth comparisons," Research Memorandum 016, Maastricht University, Maastricht Research School of Economics of Technology and Organization (METEOR).
  2. de la Croix, David & Fagnart, Jean-Francois, 1995. "Underemployment of production factors in a forward-looking model," Labour Economics, Elsevier, vol. 2(2), pages 131-159, June.
  3. de la Croix, David & Palm, Franz & Urbain, Jean-Pierre, 1996. "Labor market dynamics when effort depends on wage growth comparisons," Discussion Papers (IRES - Institut de Recherches Economiques et Sociales) 1996019, Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES), revised 00 Sep 1996.
  4. Gael M. Martin, 2000. "US deficit sustainability: a new approach based on multiple endogenous breaks," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 15(1), pages 83-105.
  5. Gael Martin, 2001. "Bayesian Analysis Of A Fractional Cointegration Model," Econometric Reviews, Taylor & Francis Journals, vol. 20(2), pages 217-234.

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