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Capital Stock and Unemployment Searching for the Missing Link

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Author Info
Ines Perez-Soba Aguilar
Elena Marquez de la Cruz
Ana Rosa Martinez-Canete
Alfonso Palacio-Vera
Abstract

The purpose of this paper is to examine the proposition that capital stock relative to aggregate output has been an important variable in the determination of the U.S. NAIRU (Non-Accelerating Inflation Rate of Unemployment) over the last four decades. We present new empirical evidence, obtained from the application of the cointegrated VAR methodology to U.S. time-series data, that lends strong support to the claim that the aggregate capital-output ratio, the real price of imports, and aggregate capacity utilization were determinants of the NAIRU in the period considered. The same evidence also shows that technical progress and changes in long-term unemployment did not affect the NAIRU. We believe this evidence suggests that, insofar as the aggregate capital-output ratio is affected by changes in real interest rates, the stance of monetary policy is one determinant of the NAIRU.

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Paper provided by Levy Economics Institute, The in its series Economics Working Paper Archive with number wp_475.

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Date of creation: Oct 2006
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Handle: RePEc:lev:wrkpap:wp_475

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  19. Stiglitz, Joseph, 1997. "Reflections on the Natural Rate Hypothesis," Journal of Economic Perspectives, American Economic Association, vol. 11(1), pages 3-10, Winter. [Downloadable!] (restricted)
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  21. Serena Ng & Pierre Perron, 2001. "LAG Length Selection and the Construction of Unit Root Tests with Good Size and Power," Econometrica, Econometric Society, vol. 69(6), pages 1519-1554, November. [Downloadable!] (restricted)
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  22. Rowthorn, R E, 1977. "Conflict, Inflation and Money," Cambridge Journal of Economics, Oxford University Press, vol. 1(3), pages 215-39, September.
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