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

Naveen Srinivasan and Pratik Mitra ()
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Pratik Mitra: Madras School of Economics

Working Papers from Madras School of Economics,Chennai,India

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.

Keywords: Interwar Unemployment; Persistence; Natural rate of unemployment; Kalman Filter (search for similar items in EconPapers)
JEL-codes: E24 J64 (search for similar items in EconPapers)
Pages: 26 pages
Date: 2016-06
New Economics Papers: this item is included in nep-his
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Journal Article: Interwar Unemployment in the UK and the US: Old and New Evidence (2016)
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Persistent link: https://EconPapers.repec.org/RePEc:mad:wpaper:2016-149

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