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Unemployment and inflation in Western Europe: solution by the boundary element method

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  • Kitov, Ivan
  • Kitov, Oleg

Abstract

Using an analog of the boundary element method in engineering and science, we analyze and model unemployment rate in Austria, Italy, the Netherlands, Sweden, Switzerland, and the United States as a function of inflation and the change in labor force. Originally, the model linking unemployment to inflation and labor force was developed and successfully tested for Austria, Canada, France, Germany, Japan, and the United States. Autoregressive properties of neither of these variables are used to predict their evolution. In this sense, the model is a self-consistent and completely deterministic one without any stochastic component (external shocks) except that associated with measurement errors and changes in measurement units. Nevertheless, the model explains between ~65% and ~95% of the variability in unemployment and inflation. For Italy, the rate of unemployment is predicted at a time horizon of nine (!) years with pseudo out-of-sample root-mean-square forecasting error of 0.55% for the period between 1973 and 2006. One can expect that the unemployment will be growing since 2008 and will reach ~11.4% [±0.6 %] near 2012. After 2012, unemployment in Italy will start to descend.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 14341.

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Date of creation: 29 Mar 2009
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Handle: RePEc:pra:mprapa:14341

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Keywords: unemployment; inflation; labor force; boundary integral method; prediction; Western Europe;

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  1. Ivan O. Kitov & Oleg I. kitov, 2008. "The driving force of labor productivity," Papers 0811.2124, arXiv.org.
  2. Andrew Atkeson & Lee E. Ohanian., 2001. "Are Phillips curves useful for forecasting inflation?," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Win, pages 2-11.
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Cited by:
  1. Kitov, Ivan & Kitov, Oleg, 2009. "A fair price for motor fuel in the United States," MPRA Paper 15039, University Library of Munich, Germany.
  2. Ivan O. Kitov, 2009. "Does economics need a scientific revolution?," Papers 0904.0729, arXiv.org.

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