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Distance to Frontier and the Big Swings of the Unemployment Rate: What Room is Left for Monetary Policy?

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Author Info
Hian Teck Hoon
Kong Weng Ho

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Abstract

This paper builds upon Hoon and Phelps (1992, 1997) to ask how much of the evolution of the unemployment rate over several decades in country can be explained by real factors in an equilibrium model of the natural rate where country's productivity growth depends upon its distance from the world's technological leader. One motivating contemporary example includes the evolution of unemployment rates in Europe as it recovered from the second world war and caught up technologically to the US. Another example that may be less familiar to many people is Singapore (the second fastest growing economy from 1960 to 2000 in Barro's data set of 112 countries) that is best thought of as catching up to the world's technological leaders (the G5 countries with whom it trades extensively and from where it receives substantial foreign direct investments) and that saw its unemployment rate go down from double-digit levels in the early 1960's to the low 2 to 3 percent in the late 1990's. How much of the big movements in the unemployment rate can be explained by non-monetary factors in a model of an endogenous natural rate exhibiting both monetary neutrality and super-neutrality? What room is left for monetary policy in explaining the movements of the unemployment rate? The paper develops the theory and seeks to ask how much non-monetary factors can quantitatively account for the evolution of the unemployment rate.

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Paper provided by Kiel Institute for the World Economy in its series Kiel Working Papers with number 1347.

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Length: 41 pages
Date of creation: Jun 2007
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Handle: RePEc:kie:kieliw:1347

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  1. Blanchard, Olivier J, 1985. "Debt, Deficits, and Finite Horizons," Journal of Political Economy, University of Chicago Press, vol. 93(2), pages 223-47, April. [Downloadable!] (restricted)
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  2. Hoon, Hian Teck & Phelps, Edmund S, 1992. "Macroeconomic Shocks in a Dynamized Model of the Natural Rate of Unemployment," American Economic Review, American Economic Association, vol. 82(4), pages 889-900, September. [Downloadable!] (restricted)
  3. Olivier J. Blanchard & Lawrence H. Summers, 1986. "Hysteresis And The European Unemployment Problem," NBER Chapters, in: NBER Macroeconomics Annual 1986, Volume 1, pages 15-90 National Bureau of Economic Research, Inc. [Downloadable!]
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  4. George A. Akerlof & William R. Dickens & George L. Perry, 1996. "The Macroeconomics of Low Inflation," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 27(1996-1), pages 1-76. [Downloadable!]
  5. Eric Parrado, 2004. "Singapore's Unique Monetary Policy: How Does it Work?," IMF Working Papers 04/10, International Monetary Fund. [Downloadable!]
  6. Athanasios Orphanides, 2003. "Historical monetary policy analysis and the Taylor rule," Finance and Economics Discussion Series 2003-36, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
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  7. Marco Bianchi & Gylfi Zoega, 1998. "Unemployment persistence: does the size of the shock matter?," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 13(3), pages 283-304. [Downloadable!]
  8. Salop, Steven C, 1979. "A Model of the Natural Rate of Unemployment," American Economic Review, American Economic Association, vol. 69(1), pages 117-25, March. [Downloadable!] (restricted)
  9. Hoon, Hian Teck & Phelps, Edmund S., 1997. "Growth, wealth and the natural rate: Is Europe's jobs crisis a growth crisis?," European Economic Review, Elsevier, vol. 41(3-5), pages 549-557, April. [Downloadable!] (restricted)
  10. Kong Weng Ho & Hian Teck Hoon, 2006. "Growth Accounting for a Follower-Economy in a World of Ideas: The Example of Singapore," Economic Growth centre Working Paper Series 0606, Nanyang Technolgical University, School of Humanities and Social Sciences, Economic Growth centre. [Downloadable!]
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  11. Charles I. Jones, 2002. "Sources of U.S. Economic Growth in a World of Ideas," American Economic Review, American Economic Association, vol. 92(1), pages 220-239, March. [Downloadable!]
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  12. Richard R. Nelson & Edmond S. Phelps, 1965. "Investment in Humans, Technological Diffusion and Economic Growth," Cowles Foundation Discussion Papers 189, Cowles Foundation, Yale University. [Downloadable!]
  13. Coe, David T & Helpman, Elhanan & Hoffmaister, Alexander W, 1997. "North-South R&D Spillovers," Economic Journal, Royal Economic Society, vol. 107(440), pages 134-49, January. [Downloadable!] (restricted)
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  14. Orphanides, Athanasios, 2003. "The quest for prosperity without inflation," Journal of Monetary Economics, Elsevier, vol. 50(3), pages 633-663, April. [Downloadable!] (restricted)
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  15. Olivier Blanchard, 2006. "European unemployment: the evolution of facts and ideas," Economic Policy, CEPR, CES, MSH, vol. 21(45), pages 5-59, 01. [Downloadable!] (restricted)
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  16. King, Thomas B. & Morley, James, 2007. "In search of the natural rate of unemployment," Journal of Monetary Economics, Elsevier, vol. 54(2), pages 550-564, March. [Downloadable!] (restricted)
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