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Interwar Unemployment in the UK and US: Old and New Evidence

Author

Listed:
  • Naveen Srinivasan

    () (Madras School of Economics)

  • Pratik Mitra

    () (Madras School of Economics)

Abstract

Two contrasting views have dominated research on unemployment during the interwar years. The conventional Keynesian view attributes the persistence of high unemployment in the UK and US during the interwar period to sluggish adjustment of nominal wages to demand shocks. In contrast, equilibrium models of unemployment suggest that the natural rate is itself endogenous, determined by technological, institutional, and demographic factors, and is therefore not necessarily constant over time. According to this view unemployment may remain elevated because some (or all) of the driving forces are persisting. How do we discriminate between these competing explanations? To this end, we estimate a timevarying parameter (TVP) model of the unemployment rate for the UK and US. Kalman filter estimates of the natural rate of unemployment suggest that most macroeconomic activity during the interwar period reflects persistent movements in steady state, not from steady state. We conclude that the observed persistence in unemployment appears to be consistent with multiple equilibria models and models with an endogeneous natural rate.

Suggested Citation

  • Naveen Srinivasan & Pratik Mitra, 2016. "Interwar Unemployment in the UK and US: Old and New Evidence," Working Papers 2016-149, Madras School of Economics,Chennai,India.
  • Handle: RePEc:mad:wpaper:2016-149
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    References listed on IDEAS

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    More about this item

    Keywords

    Interwar Unemployment; Persistence; Natural rate of unemployment; Kalman Filter;

    JEL classification:

    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • J64 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment: Models, Duration, Incidence, and Job Search

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