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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.

Suggested Citation

  • Kitov, Ivan & Kitov, Oleg, 2009. "Unemployment and inflation in Western Europe: solution by the boundary element method," MPRA Paper 14341, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:14341
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    References listed on IDEAS

    as
    1. Kitov, Ivan & Kitov, Oleg, 2008. "The driving force of labor productivity," MPRA Paper 9069, University Library of Munich, Germany.
    2. Kitov, Ivan & Kitov, Oleg & Dolinskaya, Svetlana, 2007. "Inflation as a function of labor force change rate: cointegration test for the USA," MPRA Paper 2734, University Library of Munich, Germany.
    3. Kitov, Ivan & Kitov, Oleg & Dolinskaya, Svetlana, 2007. "Relationship between inflation, unemployment and labor force change rate in France: cointegration test," MPRA Paper 2736, University Library of Munich, Germany.
    4. Andrew Atkeson & Lee E. Ohanian, 2001. "Are Phillips curves useful for forecasting inflation?," Quarterly Review, Federal Reserve Bank of Minneapolis, vol. 25(Win), pages 2-11.
    Full references (including those not matched with items on IDEAS)

    Citations

    Blog mentions

    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. In 2008, we accurately predicted the evolution of unemployment rate in Italy!
      by Ivan Kitov in Economics as Classical Mechanics on 2017-01-10 18:46:00
    2. Our prediction from 2008 on the evolution of unemployment rate in Italy at an 11-year horizon is still valid
      by Ivan Kitov in Economics as Classical Mechanics on 2020-12-21 15:35:00

    Citations

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    Cited by:

    1. Kitov, Ivan & KItov, Oleg, 2013. "Inflation, unemployment, and labor force. Phillips curves and long-term projections for Japan," MPRA Paper 49388, University Library of Munich, Germany.
    2. Ivan Kitov & Oleg Kitov, 2013. "Inflation, unemployment, and labour force. Phillips curves and long-term projections for Austria," Papers 1310.1786, arXiv.org.
    3. Ivan O. Kitov, 2009. "Does economics need a scientific revolution?," Papers 0904.0729, arXiv.org.
    4. Kitov, Ivan & Kitov, Oleg, 2009. "A fair price for motor fuel in the United States," MPRA Paper 15039, University Library of Munich, Germany.

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    More about this item

    Keywords

    unemployment; inflation; labor force; boundary integral method; prediction; Western Europe;
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • J21 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Labor Force and Employment, Size, and Structure
    • J64 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment: Models, Duration, Incidence, and Job Search
    • J11 - Labor and Demographic Economics - - Demographic Economics - - - Demographic Trends, Macroeconomic Effects, and Forecasts

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