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The political economy of unemployment and threshold effects. A nonlinear time series approach

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Author Info

  • Ruthira Naraidoo

    ()
    (Keele University, Centre for Economic Research and School of Economic and Management Studies)

  • Patrick Minford

    ()
    (Cardiff Business School, Aberconway Building, Cardiff University)

  • Ioannis A. Venetis

    ()
    (University of Patras, Department of Economics)

Abstract

This paper develops a political economy model of multiple unemployment equilibria to provide a theory of an endogenous natural rate of unemployment using a nonlinear threshold model for a number of OECD countries. The theory here sees the natural rate and the associated path of unemployment as a reaction to shocks (mainly demand in nature) and the institutional structure of the economy. The channel through which these two forces feed on each other is a political economy process whereby voters with limited information on the natural rate react to shocks by demanding more or less social protection. The empirical results obtained confirm the existence of multiple and ``moving'' equilibria (``vicious'' and ``virtuous'' circles). The nonlinear model is compared with a linear version with the nonlinear framework always exhibiting superior in-sample fit and generally better out-of-sample predictive accuracy. The conclusion is that macroeconomics and supply side policies feed on each other via the political economy.

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File URL: http://www.keele.ac.uk/depts/ec/wpapers/kerp0621.pdf
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Bibliographic Info

Paper provided by Centre for Economic Research, Keele University in its series Keele Economics Research Papers with number KERP 2006/21.

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Length: 40 pages
Date of creation: Oct 2006
Date of revision:
Handle: RePEc:kee:kerpuk:2006/21

Note: The authors would like to thank James Davidson, Costas Milas, David Peele, Ivan Paya and workshop participants for helpful comments.
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Postal: Department of Economics, University of Keele, Keele, Staffordshire, ST5 5BG - United Kingdom
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Web page: http://www.keele.ac.uk/depts/ec/cer/
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Postal: Centre for Economic Research, Research Institute for Public Policy and Management, Keele University, Staffordshire ST5 5BG - United Kingdom
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Web: http://www.keele.ac.uk/depts/ec/cer/pubs_kerps.htm

Related research

Keywords: Equilibrium unemployment; political economy; threshold model; forecasting;

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