The political economy of unemployment and threshold effects. A nonlinear time series approach
AbstractThis 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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Bibliographic InfoPaper provided by Centre for Economic Research, Keele University in its series Keele Economics Research Papers with number KERP 2006/21.
Length: 40 pages
Date of creation: Oct 2006
Date of revision:
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: Centre for Economic Research, Research Institute for Public Policy and Management, Keele University, Staffordshire ST5 5BG - United Kingdom
Find related papers by JEL classification:
- E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution
- E27 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Forecasting and Simulation: Models and Applications
- P16 - Economic Systems - - Capitalist Systems - - - Political Economy of Capitalism
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