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

  • Hian Teck Hoon
  • Kong Weng Ho

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
Date of revision:
Handle: RePEc:kie:kieliw:1347
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  1. 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.
  2. Richard R. Nelson & Edmond S. Phelps, 1965. "Investment in Humans, Technological Diffusion and Economic Growth," Cowles Foundation Discussion Papers 189, Cowles Foundation for Research in Economics, Yale University.
  3. Marco Bianchi & Gylfi Zoega, 1996. "Unemployment persistence: Does the size of the shock matter?," Bank of England working papers 50, Bank of England.
  4. Orphanides, Athanasios, 2003. "Historical monetary policy analysis and the Taylor rule," Journal of Monetary Economics, Elsevier, vol. 50(5), pages 983-1022, July.
  5. Jones, C.I., 2000. "Sources of U.S. Economic Growth in a World of Ideas," Papers 99-29, United Nations World Employment Programme-.
  6. 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.
  7. Orphanides, Athanasios, 1999. "The Quest for Prosperity Without Inflation," Working Paper Series 93, Sveriges Riksbank (Central Bank of Sweden).
  8. Coe, David T & Helpman, Elhanan & Hoffmaister, Alexander, 1995. "North-South R&D Spillovers," CEPR Discussion Papers 1133, C.E.P.R. Discussion Papers.
  9. Eric Parrado, 2004. "Singapore's Unique Monetary Policy: How Does it Work?," IMF Working Papers 04/10, International Monetary Fund.
  10. Edmund S. Phelps, 1968. "Money-Wage Dynamics and Labor-Market Equilibrium," Journal of Political Economy, University of Chicago Press, vol. 76, pages 678.
  11. Layard, Richard & Nickell, Stephen & Jackman, Richard, 2005. "Unemployment: Macroeconomic Performance and the Labour Market," OUP Catalogue, Oxford University Press, number 9780199279173, July.
  12. Olivier J. Blanchard, 1984. "Debt, Deficits and Finite Horizons," NBER Working Papers 1389, National Bureau of Economic Research, Inc.
  13. James Morley & Thomas King, 2003. "In Search of the Natural Rate of Unemployment," Computing in Economics and Finance 2003 190, Society for Computational Economics.
  14. David H. Papell & Christian J. Murray & Hala Ghiblawi, 2000. "The Structure of Unemployment," The Review of Economics and Statistics, MIT Press, vol. 82(2), pages 309-315, May.
  15. 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.
  16. Olivier Blanchard, 2005. "European Unemployment: The Evolution of Facts and Ideas," NBER Working Papers 11750, National Bureau of Economic Research, Inc.
  17. 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(1), pages 1-76.
  18. Kong Weng Ho & Hian Teck Hoon, 2006. "Growth Accounting for a Follower-Economy in a World of Ideas : The Example of Singapore," Development Economics Working Papers 22435, East Asian Bureau of Economic Research.
  19. 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.
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